UNIVERSITE MONTESQUIEU – BORDEAUX IV
ECOLE DOCTORALE ENTREPRISE ECONOMIE SOCIETE (E.D. 42)
DOCTORAT en SCIENCES DE GESTION
Chahla ANSARI AZARBAYJANI
A STUDY ACROSS OF IRAN STATE-OWNED BANKS PRIVATIZATION: CONDITIONS OF SUCCESS FOR PRIVATIZATION OF STATE-OWNED BANKS AND CONTINUATION OF PRIVATE BANKING IN IRAN
Thèse dirigée par Madame Corynne JAFFEUX, Professeur des Universités
Soutenue le 12 September, 2011
Jury (par ordre alphabétique) :
Monsieur Pedro ARBULU Maître de Conférences Suffragant
Monsieur Serge EVRAERT Professeur des Universités President
Monsieur Jean-Fabrice LEBRATY Professeur des Universités Rapportteur
Monsieur Jean-Pierre NEVEU Professeur des Universités Rapportteur
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Table of Contents
ACKNOWLEDGMENT ...... 11
DEDICATION ...... 12
RÉSUMÉ ...... 14
ABSTRACT ...... 15
MOTS‐ CLÉS ...... 16
KEYWORDS...... 16
INTRODUCTION ...... 17
PART 1 ...... 20
1.1. CHAPTER ONE: LITERATURE REVIEW OF PRIVATIZATION ...... 21
1.1.1. The History and Definition of Privatization ...... 21
1.1.2. Distinction between the Concept of Public and Private ...... 28
1.1.3. Theoretical Framework of Privatization ...... 30
1.1.4. Major Consideration for Privatization ...... 38
1.1.4.1. Restructuring Prior to Privatization ...... 38
1.1.4.2. Complementarities and Sequencing ...... 39
1.1.4.3. Speed of the Privatization Process ...... 40
1.1.4.4. Sale Policy ...... 42
1.1.4.5. Sale Methods ...... 44
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1.1.4.5.1. Sale to Private Investor ...... 46
1.1.4.5.2. Sale to the Public or Companies‐ Share Issue Privatization ...... 47
1.1.4.5.3. Sale to the Citizens by Voucher/Mass Privatization ...... 51
1.1.4.5.4. Sale to the Managers and Employees of the Firms‐Internal Buy‐Out ...... 53
1.1.4.5.5. Sale to the Original Owner‐Restitution ...... 54
1.1.4.5.6. Sale to the Foreigner ...... 54
1.1.4.6. Investor’s Returns ...... 56
1.1.4.7. Effective Status of Democracy on Privatization ...... 57
1.1.5. Data and Records ...... 62
1.1.6. Justification of State‐Owned Enterprise VS its Inefficiency ...... 64
1.1.6.1. Inefficiency of SOEs due to Weak or Adverse Incentives ...... 66
1.1.6.2. Inefficiency due to Inadequate Monitoring ...... 68
1.1.6.3. Inefficiency due to the Soft Budget Constraints ...... 69
1.1.6.4. Inefficiency due to Partial State Ownership ...... 72
1.1.6.5. Inefficiency due to Pursue Non‐economic Objectives ...... 73
1.1.7. Designing the Strategic Privatization Program ...... 73
1.1.7.1. Key Questions at Pre‐design Stage ...... 73
1.1.7.2. Optimal Design ...... 75
1.1.7.3. The Constraints ...... 77
1.1.8. Concluding Remarks ...... 79
1.2. CHAPTER TWO: PRIVATIZATION: INTERACTIONS‐ REFORMATIVE IMPACTS‐ EXPERIENCES ...... 81
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1.2.1. Chapter Summery ...... 81
1.2.2. Interaction of Privatization with Political Economy ...... 81
1.2.2.1. Political Argument ...... 81
1.2.2.2. Economical Argument ...... 85
1.2.3. Reformative Approach of Privatization ...... 89
1.2.3.1. The Policy Debate on Privatization ...... 89
1.2.3.2. Privatization as a Part of Reform Program ...... 90
1.2.3.3. Corporate Governance ...... 91
1.2.3.3.1. Interaction between Privatization and Corporate Governance...... 91
1.2.3.3.2. Development of Effective Corporate Governance System ...... 94
1.2.4. Capital Market ...... 99
1.2.4.1. Privatization versus Market Debate ...... 99
1.2.4.2. Capital Market and National Legal Systems ...... 99
1.2.4.3. Financial Market ...... 101
1.2.4.4. Market Failures ...... 102
1.2.5. Level Effects of Privatization ...... 103
1.2.5.1. Income and Wealth Distributional Level Effects ...... 103
1.2.5.2. Organization Level Effects ...... 105
1.2.5.3. Firm Level Effects ...... 106
1.2.5.4. Investment Level Effects ...... 108
1.2.6. Privatization Experiences around the World ...... 110
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1.2.6.1. Privatization in Developed Countries ...... 112
1.2.6.2. Privatization in Transition Countries ...... 116
1.2.6.3. Privatization in Developing Countries ...... 120
1.2.6.4. Privatization in China, a Claimed Implemented Model in Iran ...... 136
1.2.7. General Conditions for the Success of Privatization ...... 140
1.2.8. Concluding Remarks ...... 144
PART 2 ...... 146
2.3. CHAPTER THREE: TOWARDS DRAWING A SCOPE FOR THE CONCEPT AND EXECUTION OF PRIVATIZATION IN IRAN ...... 147
2.3.1. Chapter summery ...... 147
2.3.2. The Weight of the Past, 1960‐2010 ...... 147
2.3.2.1. Historical background –Private versus State Ownership ...... 147
2.3.2.2. From White Revolution to the Islamic Revolution: 1960s to 1979 ...... 148
2.3.2.3. The First Decade of Islamic Revolution: 1980 to 1989 ...... 149
2.3.2.4. The Second Decade of Islamic Revolution: 1990 to 1999 ...... 151
2.3.2.5. The Third Decade of Islamic Revolution: 2000 to 2009 ...... 152
2.3.2.5.1. The First half of the Third Decade: 2000‐2005 ...... 152
2.3.2.5.2. The Second Half of the Third Decade: 2005‐2009 ...... 156
2.3.3. The Major Pillars of Privatization in Iran ...... 157
2.3.3.1. Iran Privatization Organization (IPO) ...... 157
2.3.3.2. Article 44 of the Constitution Law of Islamic Republic of Iran as the Base of Privatization ...... 160
2.3.3.3. Justice Share Distribution ...... 161 5
2.3.3.3.1. Pricing ...... 163
2.3.3.3.2. The Owners ...... 164
2.3.3.3.3. Allocation Instead of Distribution ...... 166
2.3.4. Procedure and the Results of the Privatization at its Peak ...... 167
2.3.4.1. Official Evaluations and Critics on the Procedure and Results ...... 167
2.3.4.2. Analytical Evaluation of Procedure and Results by Private Sector ...... 169
2.3.5. Comparative Autopsy of the Justice Shares ...... 174
2.3.5.1. Comparative Views ...... 179
2.3.5.2. Analytical Views ...... 182
2.3.6. Government the Winner, Private Sector the Looser ...... 184
2.3.7. Concluding Remarks ...... 186
2.4. CHAPTER FOUR: A WORLDWIDE APPROACH TO THE BANK PRIVATIZATION: DEBATES AND ISSUES ...... 188
2.4.1. Chapter Summery ...... 188
2.4.2. An Overview of General Thoughts and Findings about Bank Privatization ...... 188
2.4.2.1. General Approach to the Bank Privatization ...... 188
2.4.2.2. Issues Related to the Bank Privatization ...... 191
2.4.2.3. Superiority of Private Owned and Privatized Banks to the State‐Owned Banks...... 196
2.4.3. Political –Economic Dual Nature Determinant of Bank Privatization ...... 199
2.4.3.1. Political‐Nature Side ...... 199
2.4.3.2. Economical‐Nature Side ...... 202
2.4.3.3. Dual‐Nature Side ...... 203 6
2.4.4. Foreign Ownership in Bank Privatization ...... 204
2.4.5. Foreign Banks Entry ...... 207
2.4.6. Role and Effects of Ownership in Bank Privatization ...... 209
2.4.7. Concluding Remarks ...... 216
PART 3 ...... 218
3.5. CHAPTER FIVE: COMPARATIVE OVERVIEW OF IRAN’S BANKS PRIVATIZATION AND THE WORLDWIDE EXPERIENCE ..... 219
3.5.1. Introduction ...... 219
3.5.2. Evolutionary Transition towards Iranian Banks Privatization ...... 219
3.5.3. The Impacts of Private Bank Reform in Iran ...... 221
3.5.3.1. Impact on Capital Market ...... 222
3.5.3.2. Impact on Corporate Governance, Demand VS Result ...... 225
3.5.3.3. Influential Interactions with the Competitors ...... 226
3.5.3.4. Impacts on Institutional Reforms ...... 229
3.5.3.5. Revival of Human Capital ...... 231
3.5.4. Government Intervention, Determinant Challenge ...... 231
3.5.5. Worldwide Experiences of Banks Privatization ...... 235
3.5.5.1. Evidence on Bank Privatization in Developed Countries ...... 237
3.5.5.2. Evidence on Bank Privatization in Transition Countries ...... 240
3.5.5.2.1. Hungary Experience, Recapitalize and Sell to Foreigners ...... 243
3.5.5.2.2. Poland Experience, Government Directed Development and Fear of Foreigners ...... 244
3.5.5.2.3. Czech Republic Experience, State and Insider Control Persist ...... 245 7
3.5.5.2.4. Estonia Experience, Buyer Matters ...... 246
3.5.5.2.5. Russia Experience, Rapid but not Perfect ...... 246
3.5.5.3. Evidence on Bank Privatization in Developing Countries...... 248
3.5.5.3.1. Latin America Experiences ...... 249
3.5.5.3.2. Asia Experiences ...... 251
3.5.5.3.3. Africa Experiences ...... 253
3.5.5.3.4. China Experience ...... 255
3.5.6. Banks Privatization in Iran ...... 258
3.5.6.1. Mellat Bank Privatization ...... 259
3.5.6.2. Tejarat Bank Privatization ...... 261
3.5.6.3. Saderat Bank Privatization ...... 262
3.5.6.4. Post Bank Privatization ...... 264
3.5.7. The Evidences Embraced in Privatized Iranian Banks ...... 265
3.5.8. Comparison of Worldwide Examples with Implemented Bank Privatization Model in Iran ...... 268
3.5.9. Key Questions in Bank Privatization V.S Occurred Respondings in Iran ...... 271
3.5.9.1. Why has State Ownership of Commercial Banks been so historically Prevalent? ...... 272
3.5.9.2. Why Have Governments Launched Bank Privatization Programs? ...... 272
3.5.9.3. How do Governments Select Banks to Privatize? ...... 273
3.5.9.4. How do Governments Privatize State‐Owned Banks? ...... 274
3.5.9.5. When the Governments Become Reluctant to Bank Privatization? ...... 275
3.5.9.6. How the Governments Determine the Time for the First Bank Privatization? ...... 276
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3.5.10. Impact of Bank Privatization on the Capital Market of Iran ...... 276
3.5.11. Related Beneficiary Groups of Success Evaluation of Banking Industry ...... 282
3.5.12. Concluding Remarks ...... 286
3.6. CHAPTER SIX: ANALYSIS OF STATE‐OWNED BANKS’ PRIVATIZATION STAGES AND THE APPROACH TOWARDS THE
SUCCESSFUL CONTINUATION OF PRIVATE BANKING AT THE RESULTED CONDITION ...... 287
3.6.1. Methodology ...... 287
3.6.2. Analysis ...... 291
3.6.2.1. Evaluation of SOBs privatization in Iran at Pre‐privatization Stage ...... 291
3.6.2.2. Evaluation of SOBs Privatization in Iran at Execution Stage ...... 299
3.6.2.3. Independency of Privatized SOBs’ Management in Policy and Decision Making ...... 308
3.6.2.4. Success Evaluation of SOBs Privatization ...... 310
3.6.2.5. The Probability of Re‐selling Half of the Total Distributed Justice Shares ...... 312
3.6.2.6. The Tendency of Investor Groups to Buy the Re‐offered Justice Shares ...... 315
3.6.2.7. Shares Re‐offering Probability by the Semi‐governments Institutes...... 322
3.6.2.8. Post‐privatization Performance changes of privatized SOBs ...... 326
3.6.2.9. The Conformity of Private Banking of Iran with the Current Country’s Potentialities and International Banking Standards 336
3.6.2.10. The Effective Factors in Performance Improvement of Private Banks ...... 349
3.6.2.11. Preventive Factors of Foreign Investors Attraction ...... 362
3.6.2.12. Evaluation the Methods to Management Transfer of Privatized SOBs to the Private Sector with no Change in the Ownership Structure...... 369
3.6.2.13. Effective Changes in Ownership Structure to Improve the Performance of Privatized Banks ...... 377
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3.6.2.14. Methods Evaluation for Reducing the Ownership Portion of Semi‐government Institutes in Privatized SOBs. .... 385
3.6.2.15. Evaluating the Reduction Methods of Justice Shares in Privatized SOBs ...... 393
3.6.2.16. Evaluation the Ceding Methods of Remaining Shares of Privatized SOBs ...... 401
3.6.3. Results ...... 408
CONCLUSION ...... 414
REFERENCES ...... 425
ABBREVIATIONS ...... 455
APPENDIXES ...... 458
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Acknowledgment
A number of people have contributed to this thesis, and I wish to acknowledge their contribution with gratitude.
I owe particular debt to Professor Corynne Jaffeux, my patient principal supervisor, who generously supported me with her invaluable advices and constructive comments.
The field work could not been carried out without the help of those people who devoted their time in completion the questioners and specifically the interviewees who magnanimously contributed their opinions and experiences to this study with utter frankness.
I am profoundly indebted to my scholar and patriot father for his precious lessons of endurance.
To my husband Mohammad Ehsaie, I present my deep thanks and admiration for his continuous and matchless encouraging supports. My beloved sons Mohammad Amin and Amir Taha have also happily sacrificed time to allow me to get on with this work. I also thank Ahmad Salahnejdad for providing me great help in statistical matters.
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Dedication
In the name of Lord of the Soul and Intelligence
This work is dedicated to the Iranian youth who, in coming future, will doubtlessly overcome the shortages that have been imposed on them by my extravagantly idealistic generation.
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A STUDY ACROSS OF IRAN STATE-OWNED BANKS PRIVATIZATION: CONDITIONS OF SUCCESS FOR PRIVATIZATION OF STATE-OWNED BANKS AND CONTINUATION OF PRIVATE BANKING IN IRAN
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Résumé
La privatisation a été identifiée comme un des phénomènes économiques les plus importants de l’histoire récente, entre-temps la privatisation des banques a été acceptée comme étant un des secteurs principaux de ce phénomène économique.
En se basant sur l’importance de la privatisation des banques qui a lieu partout en Iran, cette thèse se divise en deux parties.
Dans sa première partie, la thèse explore l’échec ou le succès de la privatisation des banques en Iran en assumant comment la progression s’est faite durant les deux étapes de privatisation et d’exécution, et spécifiquement afin d’identifier la combinaison de double propriété qui en est le résultat, ainsi que ses conséquences sur le contrôle de gestion des banques privatisées.
La deuxième partie se concentre sur la discussion concernant la condition de succès nécessaire pour que les banques privées iraniennes continuent à fonctionner. À ces causes, la thèse essaie de localiser une compréhension des possibilités, des barrières et des limites des banques privatisées en particulier, et des transactions bancaires privées en général.
Cette partie va également se concentrer sur les impacts de deux enjeux d’affaires de «Distribution d’actions Justice» avec la distribution 40%-50% des entreprises privatisées parmi les déciles les plus bas du pays et « la propriété d’instituts semi-gouvernementaux » qui a formé la portion principale de la combinaison de propriété des banques privatisées.
Subsidiairement, les méthodes pratiques probables proposées pour le succès des banques privées seront analysées en même temps que l’investigation de tout chaînon manquant principal, afin que le succès des banques privées en Iran continue.
Cette thèse se veut originale de par son argument concernant une large étude détaillée de la privatisation des banques en Iran, en se penchant particulièrement sur ses spécifications et en mettant en valeur la vulnérabilité et l’instabilité des banques privées dans les conditions 14
actuelles de l’Iran, elle examine les diverses solutions qui permettraient de diluer le contrôle de gestion gouvernemental qui débouche du résultat de la combinaison de propriété des banques privatisées, et se rendre compte de l’importance de l’entrée des investisseurs et des banques étrangers comme étant le chaînon manquant du succès de la continuation des banques en Iran.
A STUDY ACROSS OF IRAN STATE-OWNED BANKS PRIVATIZATION: CONDITIONS OF SUCCESS FOR PRIVATIZATION OF STATE-OWNED BANKS AND CONTINUATION OF PRIVATE BANKING IN IRAN
Abstract
Privatization has been identified as one of the most remarkable economic phenomena in recent history; the privatization of banks, meanwhile, has been known to be the core segment of this economic phenomena.
Following to the nationwide importance of bank privatization in Iran, the aim of this thesis are two folds.
In the first part, the thesis explores the failure or success of the privatization of banks in Iran by assuming how it has been progressed at the two stages of pre-privatization and execution, specifically to identify the resulted ownership combination, and its consequences on management control of the privatized banks.
The second part focuses on the discussion of success condition for continuation of private banking in Iran. Therefore, the thesis attempts to locate an understanding of the prospects, barriers and limitations of privatized banks in particular and private banking, in general.
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This part also focuses on the impacts of two issues of “Justice Shares Distribution” which deals with distributing 40%-50% of privatized enterprises among the lowest deciles of the country and “semi- government institute ownership” that has formed a main portion in ownership combination of privatized banks.
Alternatively, the probable practical methods proposed for success in private banking will be analyzed along with investigating any principal missing links of success continuation for the existed private banking in Iran.
The claim to originality in this thesis therefore lies in its argument about detailed cross study of bank privatization in Iran with particular focus on its specifications, emphasizing the vulnerability and instability of private banking in the current condition of Iran, examine the different solution to dilute the government’s management control due to the resulted ownership combination of privatized banks and to find out the importance of entry of the foreign investors and foreign banks as the missing link in successful continuation of banking in Iran.
Mots- Clés
La banque governemental, la banque privatisée, la banque privée, l’institut semi- governemental, les actions Justice, la privatisation
Keywords
State-owned bank, privatized bank, private bank, ownership, semi-government institute, Justice Shares, privatization
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Introduction
Unlike the developed countries, State ownership of large parts of the banking system is not rare in developing countries. However, since 2005 a wide spread efforts started in Iran to accelerate the execution of privatization plan based on the indicated policies in Article 44 of the constitutional Law of Islamic Republic of Iran and in a short period of time the extension of privatization process covered the limited privatization of four state-owned banks to meet the scheduled timing indicated in the 4th Economic, Social and Cultural Development plan.
Aims of the research: The objectives of this thesis may be partitioned in two discussions. First, the thesis explores the success conditions of privatizing the Iranian state-owned banks by focus on the evidences of applied method and practiced experience. In other words, the first aim is to find out how rationally the basic steps at the pre-privatization stage have been taken and how deliberately the ownership and control of the privatized banks have been transferred from the government at the privatization stage towards decreasing its incumbency in economical activities and providing the condition to improve the participation and competition of the private sector. Inevitably, it would require analyzing the main objectives and the framework of the executed privatization plan to realize the conformity of the results with the general accepted concept of bank privatization. Actually in this part, it is important to take into the consideration that, blurring boundaries is to recognize whether the government is convinced to relinquish its ownership for fully implementing the privatization process.
Second, the thesis investigates the success conditions for continuation of private banking in Iran (including the privatized banks) that will be seek in combined academic arguments and rigorously deployed evidence with practical applicability to result the in vogue managerial conditions. Certainly, to proceed in this part necessitates to identify the provided condition for the private banks as the outcome of their past nine years operation and the emerged condition of the privatized banks specifically in their newly ownership combination. The ownership combination of privatized banks has been set in a way that their full control is retained by the government. The two major elements in this combination that have the change flexibility and potentiality, are the shares ceded to the “semi-government institutes” and allocated to the “Justice Shares”. 17
They are flexible because their portion in the ownership combination can be changed. And their dependent potentiality to government’s determination can transfer any portion of these two kinds of ownership to the private sector. Therefore, as the second aim, it will be investigated their impacts on the successful continuation of the privatized banks and probability and acceptability of different solutions to improve the emerged condition. Then, according to the comparison of adaptable worldwide experiences with the existed condition of private banking in Iran the thesis will search to recognize the importance of foreign participation in banking industry of Iran to find out whether it has a positive relation with the success of Iran’s banking industry. Then, the adaptable worldwide experiences could be reconciled as proposing the success condition for continuation of private banking in Iran.
Organization of thesis: The content of the thesis is basically grounded in three parts, each includes two chapters which are brought together and synthesized as a whole. The two chapters in the first part distinctively deal with the literature review of the two concepts of privatization in general and bank privatization in particular. The second part mainly discusses the perceived concept of the privatization in Iran through the last four decades and its political-economic effects while, tracing the worldwide experiences to find out the similarities with what has happened in Iran and to elaborate the practical lessons can be explored for the continuation of private banking in Iran. The third part includes the detail focus on bank privatization in Iran, evaluation of privatization procedure from different aspects through analyzing the causes and effects.
More detail explanation of each chapter it needs to identify that the first chapter proceeds to a broad literature review of theoretical framework and major considerations of privatization in different aspects and mainly identify; the major elements of determination; the required sequential actions; the important influential factors and the areas of their impact.
The second chapter concentrates on political and economical arguments and the reformative effects of privatization addition to its interaction with the capital market that both are very compatible with general scope of present conditions in Iran. The different levels of privatization effect will be also one of the considerations in this chapter. The next main focus
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of chapter two includes a brief overview of the privatization around the world as a general background of observing the others’ success and fail experiences.
The third chapter mainly allotted to portray the concept and execution scope of privatization in Iran. The portrait includes the history of the privatization starts from a decade before the Islamic Revolution of Iran to the date of this study. According to the peak of the privatization procedure in Iran that started in 2005, the content of this chapter also focus on those institutes, laws and policies that have been the main determinant elements of the privatization in Iran since 2005. More than that, there has been devoted a considerable effort anatomizing the privatization plan and its procedure to find out the gist behind the designed plan and implemented procedure in privatizing the state-owned enterprises (including the state-owned banks) in Iran.
Chapter four is mainly allocated to the worldwide approach of bank privatization and the related debates and issues. The importance of this chapter is its application in reconciling the adaptable experiences with the success condition of private banking continuation described as the second aims of the thesis. It argues the dual political-economic nature of bank privatization and specifically the role and effect of ownership in bank privatization that is one of the crucial discussions in Iran.
Chapter five includes the comparative overview of bank privatization in Iran and the worldwide experiences in case of finding any applicable similarity or getting any practical lesson. Accordingly, it observes the outcomes of private banking in Iran which did happened for the first time in the past three decades and before privatizing the state-owned banks. This chapter also analyses the banks privatization responds to the generally propounded key questions in the matter of bank privatization hoping to reveal the main absents of the success in banking arena of Iran. Finally, with considering the specifications of the situation in Iran then, the beneficiary groups of bank privatization and the way they might evaluate any success resulted by privatizing the banks in Iran will be identified.
Chapter six describes a quantitative and qualitative analysis of all the collected data either through the 60 distributed questioners or semi-conductive interviews with 80% of the 19
responders to the questioner. The statistical evaluation of the occurrences and the outcomes of bank privatization in Iran are presented. This chapter also heavily estimates the suitability and probability of different solutions to outline the practical principles for the success continuation of private banking in Iran.
At the end, the conclusions will be submitted with considering some solutions and providing few proposals for the future.
Part 1
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1.1. Chapter One: LITERATURE REVIEW OF PRIVATIZATION 1.1.1. The History and Definition of Privatization
Throughout history, the concept of “private versus state ownership” is not an unusual meaning especially in trading and money lending. In ancient Greece, the government owned the land, forests, and mines, but contracted out the work to individuals and firms. In the Ch'in dynasty of China, the government had monopolies on salt and iron. In the Roman Republic the publicani (private individuals and companies) fulfilled virtually all of the state's economic requirements (Sobel, 1999).
By the time of the Industrial Revolution in the western industrialized societies and their colonies, the private sector was the most important producer of commercial goods and was also important in providing public goods and services. This pattern, with more government involvement in some countries and less in others, continued into the twentieth century in both Western Europe and its colonies and former colonies (Rondinelli and Iacono, 1996).
In some sources, John Diebold (1952) is assumed as the originator of the term “privatization” during his campaign to transfer government-owned services from the public to the private sector in the USA (Anderson, 1975). But the standard story on the coining of “privatization” reports that in 1969 Peter Drucker used the term “reprivatization” in the sense that economists understand it today. Drucker proposed adopting a “systematic policy of using the other, the nongovernmental institutions of the society of organizations, for the actual ‘doing,’ i.e., for performance, operations, execution. This derivation of “privatization” is commonplace in books on privatization and contracting-out published after 1987 in the United States. Although, Bel (2006) saw the whole story as a mistake and indicated that the terms “privatize” and “reprivatize” appear in the 1961 edition of Webster’s Third New International Dictionary of the English Language Unabridged. “Privatization” was defined as “to alter the status of a business or industry from public to private control or ownership”. “Re-privatization” was defined as “the act or action of privatizing again: restoration to private ownership or control (as after nationalization).” Similar dictionary definitions are now widely accepted (for instance, Oxford Dictionary of English, 2003, p. 1,401; New Oxford American Dictionary, 2005, p. 1,349). 21
The Oxford English Dictionary (second edition, 1989, volume XII, p. 521) suggests that the earliest written record of the word “privatization” in English occurred in 1959. In fact, Bel (2006) tried to demonstrate that the term of “re-privatization” was shown up on the heels of the invention of the German term “Reprivatisiering and then the current concept of privatization for the first time revealed in Nazi Economic Policy when industrialists supported Hitler’s accession to power and his economic policies. In return, they were granted a number of monopolies held or controlled by the state by Nazis. Based on this finding it can be concluded that the trend of worldwide privatization in 1980 is a reflection of the failure of nationalization introduced after the Great Depression and the Second World War.
In fact, privatization is a multilateral term mainly referring to a range of policy initiatives in different countries in a diverse forms and motives and according to many studies and written documents there exist such an presumption that from time to time and country to country there are a series of privatization, nationalization and re-privatization as a continuous process over the period.
Although, using a broader definition of privatization, one that encompassed reactively changing the policies of an immediate predecessor government- the Winston Churchill governments’ denationalization of the British steel industry during the early 1950s could well be labeled the first privatization. But the modern idea of privatization as an economic policy was pursued for the first time by the Federal Republic of Germany in 1957, when the government of Conrad Adenauer eventually sold majority state in Volkswagen in a public share offering and four years later even larger share offering of VEBA (chemical firm). In 1961, these two issues increased the number of shareholders in Germany from 500,000 to 3,000,000 (Megginson et al., 1994).
The objectives set for privatization by Adenauer were virtually the same as those listed 20 years later by the British conservative government of Margaret Thatcher, and by almost every government in the years since, and to:
Raise revenue for the state Promote economic efficiency 22
Reduce government interference in the economy Promote wider share ownership Provide the opportunity to introduce discipline Subject State-Owned enterprises to market discipline Develop the national capital market and promote wider share ownership among the citizenry (This one was mostly defined and targeted by Margaret Thatcher).
Under the military regime of Pinochet, in 1970 the government of Chile privatized all enterprises that were under state control in the “Allende” period. It seems that the speed of the process was the most important factor so that despite of many firms sold under price yet in 1980 less than 30 companies of more than 500 nationalized firms belonged to the public sector. But in fact another big step towards privatization after Adenauer was the one taken By Margaret Tatcher in 1980 when she adopted the label of “Privatization”, regarding its application was introduced by Peter Drucker and which replaced the name “denationalization” (Yergin and Stanislaw, 1998). Therefore, privatization better be considered as relatively a new economic concept that evokes sharp political reaction, the concept with complex and sometimes confusing procedure and effects. The concept which is more remedy rather than a main cure for economy of any country. In a short period of time Ronald Reagan also joined this movement and Margaret Tatcher in UK and Ronald Reagan in USA went for implementing the vast process of privatization and this period of their tenure of office named “The Tatchereagan Era” as the start point of global manifestation of privatization.
As the most common and inclusive definition, privatization is the process of transferring an industry or activity from government ownership to the private sector. The concept of privatization mostly argues for rebuilding the countries treasury, decreasing the size of government incumbency and costs, quantitative and qualitative improvement of services and production without appropriate and economical expenses or efficiency and most of the time as a step ahead towards free market.
In the first decade of 20th century, gradually all the definitions, aims and results of privatization went to be more unified till now that it is capsulated in the definition of “Widening the capital market”. It is believed that fully association with all sectors of the 23
economy such as manufacturing, energy, transport, communication, health, education and banking will enable private sector to secure significant efficiency gains in output, promote industrialization and upgrade service providing. However it has meant much more than merely transferring assets to the private sector, and is generally seen as part of a broader experience aimed at liberalizing the economy. This in turn is intended to free resources and to stimulate innovation as well as growth. It is intended to change economic culture and values, and to promote entrepreneurial dynamics. Those countries who intend to shift from centralization to market liberalization resort privatization as well as in developing countries and a few others that remain under Communist regimes. There is a wide variety of privatization techniques mostly are drawn from experiences with corporate mergers and acquisitions and also some new techniques designed to meet specific objectives. Obviously, some have been followed more rigorously, where others have been cautious, or less effectively implemented. The cause of privatization is not limited to aforementioned reasons. Sometime it has become a means of hiding government’s weakness and corruption without efficiency gains and worst of all for treacherously strengthening a special group or political party. In privatization, the important factor for investors is to demonstrate flexibility in dialogue with government. It can be argued that those private investors who show such flexibility towards the conditions of each country will be the beneficiaries. The objectives of privatization thus form part of an overall economic development process, often imposed by international donor agencies, such as the IMF and the World Bank, as a condition for lending based on the different concept of privatization in developed and developing countries. They generally suggest that privatization should fulfill the different objectives in each category such as listed in table 1.
However, despite of the objectives’ category indicated in table 1 for developed and developing countries, there still remained a question of how can we differentiate the way these two types of countries see the privatization in the context of globalization. For the country like Iran the privatization at the first step is a sort of change to threat the government’s position and status particularly when the state-owned enterprises drain national budgets and dominates the majority of countries economic activities. Therefore, in such cases mostly the delay for privatization would be the first and easiest idea to be applied.
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Table1. Different Demanded Privatization Objectives in developed and developing countries
Developed Countries Developing Countries
Improve the efficiency of the hitherto publicly- Improve efficiency, productivity and profitability owned corporations and important sectors of the of enterprises through competition and elimination economy by restoring market discipline in certain of state intervention key areas Create a liberal economic environment Reduce state involvement in enterprise decision- making and resolve the problems of management and Relieve budgetary strains on the government control which so often beset relations with Facilitate access of private sectors to financial nationalized industries resources
Reduce state financial burden Insulate the economy from political interference
Contribute to the development of the domestic Broaden the capital market and widen indigenous financial market ownership
Gain political advantage Release resources for social and physical Handle inflation and growing unemployment infrastructure
Transfer ownership to citizens Create a more favorable environment for foreign investment Ease problems of public sector by weakening the public sector unions Bring workers and employees into share ownership
Source: Table 5-1 of Shahriari-Rad, 2003
Although, it is a permanent solution and sooner or later the social-economic obligation of privatization becomes unavoidable and the governments have to provide and execute its privatization plan. More often, these types of governments replace the delay with the slow 25
motion action and their next solution would be going for the gradual privatization as a protective policy to retain the control. Generally the gradual privatization is either be implemented by partial privatization with maintaining the government as the major shareholder like the example of India as Mohan (2007) called it “disinvestment” or be done in different stages like China to do very little to lessen the state’s role in economic decision- making (Guriev and Megginson, 2007) or finally, like in Iran when the role of private sector is demagogically replaced by semi-government institutions in the privatization scenario to make a semi-governmental economy instead of economy liberalization as the head of the Islamic Republic Parliament, Ali Larijani (2011) named it and plundering the national wealth as the vice president of Article 90 committee of the parliament, Zakani (2011) mentioned in criticizing the way of ceding during the privatization process. All in all it happens when the reluctance of the government confront with its obligation of privatization. Definitely in such a condition, most of the defined objectives towards the direction of national best interest can hardly be achieved. This statement is also confirmed by Shahriari-Rad (2003) for the case of Iran when he submitted that any developing countries like Iran throughout history in general and post- revolutionary period in particular, the ongoing conflicts over values and the private/public distinction, has been an arena for the pursuit of other (often ideological) disputes which have been left unresolved because the power structure has not been clearly captured by a defined group of interests. As far as the most of the national resources in Iran have been controlled by the state, and the definition of ownership is unclear therefore, the existing under-developed state system is incapable of implementing the models belong to developed countries, or at least cannot implement one without major modification.
Additionally, there is another major difference between the developed and developing countries in the direction of achieving their mentioned goals. Unlike the developed countries, the developing countries can hardly depend on their own internal sources for executing the entire vast privatization plan. They often lack both social and economic institutionalization, which may have led to state economic control in the first place. Yet, these generalizations are of limited values until be discussed later in more detail (Shahriari-Rad, 2003).
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Hlupekile Longwe (2003) notified three reasons behind IMF demand strategy from developing countries. Firstly, it is said that the administration of state-owned companies is more inefficient, because they operate like government bureaucracies, and are protected by government from having to adapt to competition and market forces. Secondly, they are more likely to be internally corrupt, such as inflated payrolls to provide employment to relatives and placement of government officials. Thirdly, their revenues and assets are likely to be diverted by corrupt government officials who gain external control over company decision making. All three of these factors lead to State-Owned that provide services and commodities at uncompetitive prices, and also lead to low productivity and loss making, and to the ultimate collapse of the enterprise if exposed to competition in a free market.
At the same time regarding the above rationales, the counter arguments should also be considered. For example, when the inefficiency and corruption of state enterprises are being pointed, does it mean that public or multi-nationals companies are any different or better? And is privatization truly is the only solution for eliminating the corruption? And is it not possible to deal with the underlying issues of good governance, and eliminate corruption amongst government officials? Does it not mean that proceeding to the “effect” provides a desirable safe margin for the “cause” which is the corrupted or powerless government? Why the institutions like World Bank or IMF encouraging or imposing the nations to take corrupt government as a given?
Helmmann et al. (2000) correctly advised that banking crises are important not just because of the devastation that they bring to one particular sector of the economy, but because typically the shock waves affect the entire economy. However, the crises of 2007 brought up a negative weight of privatization specially in banking sector. Saha and Sensarma (2009) stated that during the recent financial crisis policy makers around the world have turned their attention to state ownership of banks. Ironically as recently as a decade ago there was an apparent consensus in favor of bank privatization, and governments in developed countries showing tendency toward more prudential banking behavior to face less moral hazard and for the same reason the government in developing countries were compelled to divest a significant proportion of the equity of the state-owned banks. This was seen as a cure for non-performing
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assets, a chronic problem that was associated with public sector banks. But in a dramatic reversal of fortune, it is now the private sector banks that are at the centre stage of recent meltdown and have even been blamed in the media for their pursuit of profit. That is why the policy makers have preferred to bailout distressed private banks, and even nationalized many of them as they have found the recapitalization as one immediate benefit of nationalization. It is also worth adding a state of Nobel Prize winner, Paul Krugman (2009) in pointing to the recent crises submitted that the recapitalization of the American banking system will eventually have to get bigger and broader, and that there will eventually have to be more assertion of government control. In effect, it will come closer to a full temporary nationalization of a significant part of the financial system. Just to be clear, this isn’t a long- term goal but a matter of seizing the economy’s commanding heights. Finance should be re-privatized as soon as it’s safe to do so.
1.1.2. Distinction between the Concept of Public and Private
Addition to the general history and definition of privatization it seems necessary to distinct the concept of private from public before discussion of different aspects of privatization.
When the meaning of privatization is going to be clarified, it can be illuminated as an idea, as theory and rhetoric, and as a political practice. But on the top, it is as a policy movement and as a process that show every sign of reconstituting major institutional domains of contemporary society.
In any of above criteria the term “public” is always closely stands next or opposite to the term “private” so close that Starr (1998) claimed: To speak intelligently about modern societies and politics without using the words public and private would be as great an achievement as writing a novel without the word "the", or pointing to those ideas that public is to private as open is to closed.
Many things seem to be public and private at the same time in varying degrees or in different ways. Some time it becomes an endless quarrel about whether some act or institution is really public or private or even is it quasi-public or semi-private? In desperation some theorists
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announce that the distinction is outdated or so ideologically loaded that it ought to be discarded, or that it is a distinction without a difference!
Public often means “common”, which does not necessarily means governmental such as speaking about public health or public opinion. But in the modern world the concepts of governmental and public have become so closely linked that in some contexts they are interchangeable.
As the concept of the public sphere, it may be conceived of as the open and visible-the sphere of public life, public theater, the public marketplace, public sociability. The public sphere also may be conceived of as that which applies to the whole people or, the general public or the public at large, in which case the public may consist of an aggregate or a mass who have no direct contact or social relation-the very opposite of a sphere of sociability. Or the public sphere may be conceived specifically as the domain circumscribed by the state, although exactly where to draw the state's boundaries may be difficult indeed (Starr, 1998).
As the concept of the private sphere, it may be conceived of as the modern generation became equipped with larger homes, private cars, televisions, and other resources, more time and capital came to be invested in the private interior of the family and less in public taverns, squares, and streets. Therefore the privatization is the result of a decline of public culture and sociability, a deadening of public life and public space and it leads to define privatization as a shift of individual involvements from the whole to the part-that is, from public action to private concerns. In other words, privatization is a withdrawal from the state, not of individual involvements, but of assets, functions, indeed entire institutions.
Starr (1988) fairly explains how in liberal democratic thought, public and private are central terms in the language of claims-making and particularly, they provide a deeply resonant vocabulary for making claims against the state. He also adds that in liberal though there is a polarity between public and private associated with the state in one direction, the individual in the other. However, it is the state that shapes private economic choices and relations. The state is imminent in the economy and society, but the degree of penetration varies, and the public- private system of classification is used to express these variations. In general, and behind the 29
legal categories, of course, the boundaries are blurred. On the one hand, private interests reach into the conduct of the state and its agencies; on the other, the state reaches across the public- private boundary to regulate private contracts and the conduct of private corporations and other associations. Through tax preferences and credit guarantees, the state shapes private economic choices and relations.
1.1.3. Theoretical Framework of Privatization
When Peter Drucker (1969) first suggested the private sector as the ideal “social institution” after World War II, he was considered a renegade. But now the dramatic global growth of privatization is tremendously documented in the recent empirical studies. Privatization has become an integral part of the reform and globalization strategy in many economies. Some of the largest and most liquid firms are privatized firms that have dramatically influenced the market capitalization, trade volumes, and local investor participation in these economies.
There are many scholar researchers who have developed different theoretical model of privatization but all for highlighting the common issues like manner in which a government’s specific policies concerning the state owned enterprise (SOE) before and after privatization affects the share price, optimal investment choice made by the managers after privatization, prioritization of SOE sales, entry restrictions, and the state’s use of monopoly power.
Generally in any study about privatization there is an indication about its objectives but not with wide differences in between. To Errunza and Mazumdar (2000), most of the time these objectives include revenue collection; promotion of efficiency gains; reduction of government interference; development of capital markets and widening of share ownership; introduction of competition and exposure to market discipline. Megginson (2005) named mainly four reasons or motivations of governments for launching privatization programs including raising money, help to develop national capital market, dissatisfaction with the actual performance of SOEs and also because of inherently better management and more efficient of private owned companies than SOEs. There are also many debate challenging sort of studies about the success of privatizations in achieving the objectives. There are a number of countries, have only achieved some of their stated objectives and Errunza and Mazumdar (2000) indicated
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three factors which are attributed to such an incomplete success including; firstly, not accommodated internal trade-offs with privatization program, e.g. revenue maximization versus wider local participation; secondly, when these programs were not forced to compromise some of their goals due to political/social considerations; thirdly, the limited success of privatizations may also be due to a lack of an integrated analysis of the most basic financial issues at stake. These include the magnitude of government subsidies provided to the SOE; the design of privatizations in terms of the preferred client (corporate, individual, domestic or foreign), the residual government ownership, the taxation and competitive industry environment following a sell-off; and the sequence in which SOEs should be brought to the market. The fundament of privatization is based on the subject of ownership and Filipovic (2005) correctly pointed that the theoretical framework behind the idea of privatization mainly relies on understanding the concept of property rights. The importance of individual property right is obvious in many aspects as strong individual incentives. Even a free market economy largely depends on well-defined property rights in which people can make individual decisions in their own interests. The degree of democracy is the scale of property right in any society. To Mankiw (2001), the competitive markets, in which transactions are effectively handled by market prices, rely heavily on formal, well-defined property rights. Although privatization has been implemented by many different political systems which means the different degree of democracy, but there is not enough evidence of examining the relation between democracy and the impacts or the success of privatization. Yet, the property right is a very crucial issue in Iran and latterly it would be mentioned whether it has been connived or not? Another fundamental aspect of privatization, which plays an essential part in the efficiency improvement associated with privatization, is embedded in the Coase Theorem. Ronald Coase (1960) proposed that the private sector is effective in solving the problem of externalities, through costless bargaining, driven by individual incentives. Mankiw (2001) stated that according to the Coase Theorem, individual parties will directly or indirectly take part in a cost-benefit analysis, which will eventually result in the most efficient solution. Thus, Coase argues the role of the legal system is to establish rights that would allow the private sector to solve the problem of externalities with the most effective solution. A major implication of the Coase Theorem is the fact that the initial allocation of rights does not affect the outcome as 31
long as the rights are well-defined. Furthermore, the solution that results from bargaining of private parties will be a Pareto optimal solution. From the perspective of privatization, the Coase Theorem implies that by shifting the assets from the state to the private investors, the market will become more effective in dealing with numerous externalities (Medema and Zerbe, 1999).
The empirical study of bank privatization by Clarck et al. (2004) is a good example of those who have studied some aspects of privatization, and have faced deeper questions and doubts. Without limiting the discussion to any of developed or developing or even transition countries, a certain attention devoted to explain that less competition, greater political intervention and weaker corporate governance are strong theoretical arguments against state ownership, but it does not necessarily follow that privatization will cure these ills. It is a fact that when the same government actors responsible for the poor performance of SOEs are responsible for the design and execution of the privatization program then, how political objectives, poor information, and principal/agent problems can compromise the privatized firm in ways that keep it from performing as well as a de novo private enterprise?
Clarck et al. (2004) grouped the privatization literature around three main themes of competition, political intervention, and corporate governance. In the theme of competition they argued that in case of expansion of competition, privatization will improve the operation of the firm and the allocation of resources in the economy and distinguishes that private firm may has a better chance to face a more competitive market because self-interested politicians may use SOEs to pursue political goals, such as expanding patronage jobs or providing subsides to favored constituents (see Shapiro and Willig, 1990; Jones, 1985; Vickers and Yarrow, 1991). Under these circumstances state owned enterprises are very behind and cannot compete effectively with profit maximizing firms and will run deficits in competitive markets that have to be covered by subsidies from the government treasury or by government guaranteed debt. That terminates politicians and bureaucrats in having a strong incentive to reduce the fiscal drain of such subsidies by giving SOEs monopolies, erecting barriers to entry or trade in SOE markets, or preventing competition with SOEs in other ways, all with adverse effects on efficiency (Shleifer and Vishny, 1994 and Boycko, Shleifer,Vishny, 1996). Sappington and Sidak (1999) pointed another reason why SOEs face less competition than the 32
private firms in a way that a subsidized SOE can undercut private rivals who have to make a profit to survive. For example, a state owned bank might have more branches, higher deposit rates, and lower lending rates than its rivals because its excess costs are covered by government subsidy. In this case, instead of a competitive market improving SOE performance, the SOE hampers market performance. There is supportive empirical evidence for both protection of SOEs, SOE market power, and subsidies (see Jones, 1985; Kikeri, Nellis, Shirley, 1992; and World Bank, 1995).
Even without changing market structure privatization could improve efficiency if it hinders interventions by politicians or bureaucrats intent on using SOEs to further their political or personal goals. Political actors can also try to influence private firms to hire or subsidize their constituents, but this is harder to hide and private owners have stronger incentives and capabilities than SOE managers to oppose such interventions (Shleifer and Vishny, 1994; Galal, 1991; World Bank, 1995). For example, the profit oriented owners of a private bank, especially one that must answer to foreign owners, would be more strongly motivated to protect its prudential lending policies or costs minimization rules from government interventions than an SOE. Privatization could also prevent SOE employees and other interest groups from “capturing” the government body charged with monitoring the state enterprise or bribing corrupt politicians to protect their interests (Shleifer and Vishny, 1994). Capture or corruption could also occur with private firms, but the assumption is that the direct ownership link, by making the government an employer as well as a regulator, increases the likelihood of capture and corruption. The argument that SOEs are more subject to intervention and will receive larger subsidies than private firms is substantiated by empirical observations (see Shirley and Nellis, 1991; World Bank, 1995; Claessens and Peters, 1997; Djankov, 1999).
The third group of studies argues that corporate governance will be weaker in SOEs than in private firms because of agency problems. SOEs have multiple objectives and many principals who have no clear responsibility for monitoring. Large private corporations can also have many small shareholders, information asymmetries between owners and managers, and problems defining goals and holding management accountable. Yet even private firms with highly diffuse ownership will be better governed than SOEs according to these studies.
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Alchian (1965) argued that since all citizens can be considered SOE owners, an SOE’s ownership is more widely distributed than a private firm’s ever could be. Since there is no way for any single owner to sell shares of an SOE, public owners stand to gain or lose less from firm performance than private owners who can sell their shares, so public owners will monitor performance less. Without a market for ownership, information on firm performance will be scarce and non-comparable and alternatively, government will be the sole, concentrated owner who is free to pursue inefficient goals without the checking influence of smaller owners and with lower motivation to monitor than a private owner (Vickers and Yarrow, 1991; Vining, 1992). Another reason why SOEs might have poorer corporate governance is weak incentives for managers to perform efficiently. SOE managers do not face a market for their skills or a credible threat of losing their job for non-performance, and bankruptcy, liquidation or hostile takeover are not credible threats for state owned firms (Berglof and Roland, 1998; Dewatripont and Maskin, 1995; Schmidt, 1996; Sheshinski and Lopez-Calva, 1999; Vickers and Yarrow, 1991).
Does this mean that a privatized firm will perform better, the same or worse than it would under state ownership? There are many critics of privatization like Stiglitz (1999a, 1999b); Cook, Kirkpatrick (1988); Caves (1990); Kay, Thompson (1986) who believed that privatized firm is a copy of private firm with the distinct and considerable differences with the origin. But this criticism is misguided if privatized firms still outperform SOEs. Some authors as Stiglitz (1999a; 1999b) go so far as to argue that if the root cause of poor SOE performance was an institutional environment that hampered voters from holding politicians accountable, then privatization will be as prone to error as SOE management. Megginson (2007) addressed many others like Adam, Cavendish, Mistry (1992); Caves (1990); Commander and Killick (1988); Cook and Kirkpatrick (1988, 1997), believed that underdeveloped capital markets, weak court systems, inadequate procedure for bankruptcy or takeover will all prevent privatized firms from performing efficiently, especially in developing countries where these market and institutional failures are common. In the area of the same discussion for transition countries there are many competent references like Earle et al. (1995); Frydman et al. (1997); Barberis et al. (1996); Havarylyshyn and McGettigan (1999); Kane (1999); Dyck (1997); Claessens and Djankov, (1999) to argue that privatized firms in transitional economies will be
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less efficient if they were sold to their managers and workers since this may prevent necessary restructuring and limit capital infusion.
The empirical evidences suggest that, while privatized firms may not be identical to private firms, they are usually superior to state-owned enterprises (see studies reviewed in Millward, 1982; Millward and Parker, 1983; Boardman and Vining, 1989; D’Souza and Megginson, 1999; Megginson and Netter, 2001).
There are many theoretical economic benefits that are connected to the process of privatization. Most of the time, privatization is a well experienced method or solution to reduce the size of the existing government, based on the idea that many governments have become too large and overextended, consisting of unnecessary layers of bureaucracy. Privatization is in fact a restructuring of government body that influences its size and interference addition to the revenue collection and also in a right condition it should behave as an engine for the economic growth of the country. The private sector responds to incentives in the market, while the public sector often has non-economic goals. In other words, the public sector is not highly motivated to maximize production and allocate resources effectively, causing the government to run high-cost, low-income enterprises.
There are many theoretical fiscal and economic impacts connected to the process of privatization. The gist of privatization is the shift of focus from political goals to economic goals, which leads to development of the market economy and privatizing reduce the role of the government in the economy and by reducing the size of the public sector the government reduces total expenditure and begins collecting taxes on all the businesses that are now privatized. This process can help bring an end to a vicious cycle of over-borrowing and continuous increase of the national debt (Poole, 1996).
The process of privatization causes less chance for the government to negatively impact the economy and the downsizing aspect of privatization is an important one since bad government policies and government corruption can play a large, negative role in economic growth. Therefore, privatization can have a positive secondary effect on a country’s fiscal situation and it should not be used to finance new government expenditures and pay off future debts. 35
Instead, privatization enables countries to pay a portion of their existing debt, thus reducing interest rates and raising the level of investment (Easterly, 2001).
With the same view but different expression, Megginson (2005) stated that governments have two strictly fiscal reasons of or adopting privatization programs. First, government can raise a great deal of revenue by selling their stakes in public firm through either public share offerings or private asset sales. Secondly for many countries, even more important reason to begin privatizing is to stop the outflow or public funds as subsidies for state enterprise losses.
Gureiv and Megginson (2007) followed this argument that raising cash for the government is related to the privatization’s impact on productivity. If the public ownership is optimal, then government is better off keeping the firms in public ownership and receiving the stream of profits. If the government is cash-strapped it should issue debt (or raise taxes). The privatization proceeds are high only when the new private owners are expected to be more efficient. Therefore, the fiscal benefits of privatization are certainly related to the efficiency and welfare advantages of private ownership. Yet, the fiscal issues are very important as they provide government with incentives to undertake the privatization–to raise cash and to eliminate public subsidies to SOE.
Easterly (2001) concluded that individual policies such as aid for investment, population control, and human capital investment have all failed as a solution to the lack of economic growth in underdeveloped countries. One of the underlying themes throughout Easterly’s book is the idea that people respond to incentives. Following this idea, Filipovic (2005) believed that, along with creating incentives, privatization gives ownership to a larger percentage of the population. Given the level of established property rights, individuals become more motivated and driven to work on and invest in their property since they are directly compensated for their efforts. Therefore, privatization will cause an increase in investment for yet another reason (Poole, 1996). Furthermore, state ownership leads to crowding-out of investment from the private sector. In order to retain a monopoly in a particular industry, state enterprises prevent the private sector from getting to credit (Cook and Uchida, 2001). Privatization leads to an increase in foreign direct investment which can potentially play a significant factor in the quest for growth (Filipovic, 2005). As the definition of World Bank (2002) foreign investment 36
has “positive spillovers of improved technology, better management skills, and access to international production networks”.
Easterly (2001) stressed the importance of the possible benefits from technological improvements as well as the spillover effect created from new innovations. In fact, Easterly presented the theory and examples of how underdeveloped countries might have an advantage over developed countries when it comes to new technology. He points out the possibility that underdeveloped countries have less invested in old technology, and are therefore more willing to invest in new technology. Thus, foreign direct investment could potentially have multiple positive effects on the growth of underdeveloped countries.
Theoretical analysis of privatization suggests that incentives play a significant role in the potential success of privatization as a factor of economic growth. In fact, privatization, accompanied by appropriate structural reforms, creates incentives to improve economic efficiency, increase investment, and adopt new technologies. Furthermore, the methods of implementing privatization play an important role in creating the right incentives and leading the way for the appropriate economic restructuring. It is essential to note that the success of privatization largely depends on the government commitment to legal and regulatory reforms. Cook and Uchida (2001) suggested that the lack of appropriate governmental reforms might be the cause for a negative relationship between privatization and economic growth.
Regularly, no study or argue about privatization can be done without having the method of privatization in the main scope. However, all the possible and experienced methods have been generalized in a few. But yet, there is no rigidity or fixed formulation for privatization. The selection of each method totally depends on the political view and target of privatizing government including the economic condition of its country. Therefore, because of sufficient flexibility of all privatization methods, the formation and the amount of any adaptive or innovative change on selected method is strongly based on the political structure and intention of the privatized government addition to the intelligence and related knowledge of the policy makers.
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The brief description of the methods (known as the generally basic ones), will provide more appropriate background to proceed to the other aspects of privatization.
1.1.4. Major Consideration for Privatization 1.1.4.1. Restructuring Prior to Privatization
Privatization like many other national plans includes some important considerations common for all countries in general and different in details for each. These considerations are deployed from pre-stages to post-stages of any privatization procedure. Usually the pre-stage actions are taken by the privatizer government mostly for the issues that the future owners will not appreciate or will not be able to handle it as well as the government itself. Lay off the excess employees are one of the explicit example of these types of pre-privatization actions in the countries that it raise some negative social effects without necessary legal implemented protection for private sector. Restructuring before the privatization is the action often taken by the governments just to provide better conditions (more attractiveness) for the firms to be sold better. But does it pay to restructure the firm before privatizing? The evidence suggests a negative answer, in line with the basic logic of privatization: privatization makes sense precisely because governments are not good at restructuring firms. As shown by Lopez-de-Silanes (1997) and Chong and Lopez-de-Silanes (2003) who studied the effect of pre-privatization. They concluded that restructuring on the net privatization price received, debt absorption has no effect on the net price, while “investment” and “efficiency” programs actually reduce the price. Even labor force retrenchment programs are counterproductive, as they all too often lead to adverse selection in the employees being let go.
However, the restructuring experience of China indicates that in case of coordination and consistency between the restructuring and the sale method the successful results will be achievable. Gan et al. (2008) stated that instead of outright privatization, China concentrated first on productivity improvement by initiating enterprise governance structures that stressed autonomy and better incentives and then later by adopting long-term managerial contracts with pre-specified financial targets (such as 38
profits and taxes). Instead of introducing markets and liberalizing prices overnight, China first created markets at the margin, parallel to the planned economy, by introducing the “dual-track system” in the state industrial sector and by lowering bureaucratic barriers to entry to the once state-monopolized industries. Admittedly, the reforms brought about fundamental improvements in output and productivity.
The financial restructuring is also one of those pre-actions that governments may take specifically in bank privatization as one of the most (if not the most) important restructuring. This kind of restructuring should mainly improve the financial reports transparency distinctively on the bad debts. The more details will be discussed in later chapters.
1.1.4.2. Complementarities and Sequencing
The success of privatization depends on the quality of economic and political institutions. Therefore reforms assuring property rights protection, competition and openness, hard budget constraints, good corporate governance, low corruption, and optimal regulation are all complementary to privatization.
Guriev and Megginson (2007) submitted that the fundamental problem of privatization is that the need for privatization is stronger in countries with less competent and accountable governments, yet these are exactly the countries that lack mature economic and political institutions. Hence, the government that cannot run the publicly owned firms well is often the government that is not able to design and implement privatization well and to carry out the complementary reforms. They call this situation as a chicken-and-egg problem while the problem maker is going to be the problem solver because such a privatizer government should first build the market institutions that would reinforce the benefits of privatization. On the other hand, it is not clear why the reforms introducing such institutions would find any support until there is a critical mass of private ownership. This problem is virtually absent in OECD countries because such institutions are already in the place that they should be and more than that the majority of voters in this countries respect private property. 39
There is completely different situation in developing and especially transition countries. Guriev and Megginson (2007) pointed to the situation prior to mass privatization, where the demand for market institutions is simply absent.
It is certainly not clear which approach is better suited for solving the chicken-and- egg problem. Some countries have tried the “Machiavellian Privatization” approach by selling cheap and fast in order to create a demand for institutions (Biais and Perotti 2002). Some others delay privatization until the institutions were in place (Guriev and Megginson, 2007). China is a proper example of delay where Gan et al. (2008) explained that in contrast to mass privatization, where privatization was pushed through by the central governments as a high priority at the beginning of the transition in the early 1990s, the Chinese government tried to avoid privatization as much as they can and privatization was delayed for more than a decade. In Central and Eastern Europe, both approaches were tried and ultimately both succeeded – probably because of the external anchor of possible EU accession. In the former Soviet Union, both approaches were attempted but neither seems to have succeeded. In some countries, both privatization and institutional changes have been delayed indefinitely; in others, privatization has happened but institutional change is still slow. In some countries, particularly Russia, privatization was deemed illegitimate by the vast majority of population because of the perceived corruption of the sale process. This eventually resulted in a policy reversal, including major renationalization.
1.1.4.3. Speed of the Privatization Process
Time is one of the most critical and destiny definer of privatization. It is indeed very important to determine when the privatization should be started, how long should it take to be done, what will be the cost or benefit of proceeding fast or slow?
Guriev and Megginson (2007) pointed out that in order to maximize privatization revenues and find the most efficient owners, privatization should be administered case by case rather than en masse. However, as Boycko et al. (1996) argued, 40
privatization often has to be undertaken by a divided government. In this case, the window of opportunity is very narrow and the case by case privatization is too slow while rapid, mass privatization may assure the transformation’s irreversibility. The problem with mass privatization is that if the government fails to design the mass privatization process well, this may undermine the public support for further reforms and the legitimacy of the emerging private property rights regime.
Another sequencing/speed issue is whether to restructure and improve performance before privatization, not least in order to maximize privatization revenues. Boycko et al. (1996) argued that if the firm can be made profitable under public ownership, it should probably not be privatized in the first place. And vice versa, if the firm is slated for privatization as the government bureaucracy is not capable of running it, why trust the bureaucracy with restructuring the firm?
Another trade off related to the time factor is between well and fast privatization. Is it better to devote the procedure quality of the privatization in the cost of its speed or vice-versa? As the corollary of Megginson (2005) if a choice must be made, it is better to privatize well than to privatize quickly. Economic reformers often believe that they have only a narrow window of opportunity in which to implement changes such as price liberalization or privatization before the forces of reaction return to power. Acting on this belief, reformers often ram through a raft of major policy changes in a very short time, in an approach that has come to be known as "shock therapy." While the proponents of shock therapy can make a case that their approach worked in the central and Eastern Europe during the 1990s, many would dispute that the therapy really had to be as shocking as it was. In particular, China's much more measured (and successful) approach to reform suggests that a "slow but steady" approach may work better in many cases. Even in transition countries, it became clear after the fact there was far less danger of a return to socialism or a reaction to market- oriented policies than reformers had initially feared.
Megginson (2005) tied the different models together to announce this guiding philosophy to the policy makers that there should be a sequence of reforms in a way 41
that maximizes political support for further reforms, by building on success. To elaborate this concept, he explained that the easiest and least controversial sales should be executed first, and the policy makers should allow sufficient time to elapse for these sales to be perceived as successful. Once this is achieved, more controversial privatizations of core service providers and companies requiring significant restructuring can be implemented. Not only does a measured approach help diffuse political opposition to privatization, it also allows time for capital makers to develop and for practitioners to learn the skills of modern financial capitalism.
1.1.4.4. Sale Policy
Generally, the best sale is the sale with best price at the best time. But this concept has some different description in the case of sale as a privatization. Suppose that a government has decided to implement privatization at the best possible time. Then the objective of privatization may define what the best sale means? Demagogic government mostly goes for buying votes by selling firms. Therefore to them, the best sale is the most popular one with the short term political feedback no matter in what price or what amount of cash injection to the budget. That is one of the reasons when the policy makers are eager to under price and preferably choose the voucher sale method by ignoring the later effects. But for any accountable government, especially in a democratic society, the definition of the best sale during the procedure of privatization is far beyond. The best sale is not only the best price at the best time, but also includes the best buyer. Any accountable government is responsible to include economic growth and industrial development as a part of its privatization objectives. And these objectives cannot be achieved without the presence of qualified buyers of SOEs. However, there are many obvious examples, especially in developing and under developing countries when the governments do not relinquish their total ownership and interventions in privatized SOEs, because of their feebleness in finding or better say, choosing the best buyer.
Going back to the importance of best buyer, Megginson (2005) stated not all potential buyers of a divested SOE will make equally capable owners. If a company is to be 42
divested using an auction (asset sale), those responsible for conducting the sale should always try both to attract as many bidders as possible and to attract potential buyers who can manage the divested company most effectively. In general, this means attracting established companies operating in the same industry, since only these companies have the managerial knowledge, industry- specific technology, and financial strength required to restructure the privatized firm in a way that positions it for long-term prosperity. Since state enterprises are almost invariably overstaffed, undercapitalized, and far off the industry's technological frontier, it is imperative that these companies be sold to strategic buyers that have both the incentive and ability to restructure the in a value-maximizing way. In many real cases, this means that SOEs should be sold to western multinational corporations, if it is possible to attract such bidders.
The term upon which SOEs can be sold through asset sale auctions will depend upon a number of factors. The most important influences are the condition of the company being sold, the attractiveness of the country as a target for foreign direct investment, and the global health and competitiveness of the industry. As a practical matter, of course, no country can manufacture a perfect timing opportunity to divest its SOEs. Countries can, however, be prepared to exploit opportunities that present themselves by having plans in place to sell companies when market conditions are right, and actively working to attract the desired bidders.
As mentioned above the best price is one of the determinant elements of any kind of sales. But again in privatization it involves more expanded definition. The best price in selling any SOEs should be considered along the way of its payment whether it is in cash at once, partly cash and partly installation, cession of assets toward the settlement of government’s debt, long term installation without any down payment or any other complex or ambiguous method.
At the end it is worth adding that for a variety of reasons Megginson (2005) indicated that most initial privatizations involve partial sales of state enterprises. Phrased differently, initial privatization rarely create companies that are totally 43
private owned, but instead create mixed ownership enterprises in which governments retain large (often majority) equity stakes. This is especially true for extremely large state enterprises which must be sold in multiples tranches over several years in order not to overwhelm the absorptive capacity of national stock markets. Some often, governments choose to privatize slowly, primarily in order to demonstrate their commitment to noninterference in the affairs of the privatized company even when they retain the majority voting power to do so.
By assuming that the full privatization should be the ultimate goal then, as long as a government retains ownership in any important company, there will be both political pressure to intervene in the firm's operations and a convenient mechanism for doing so. In practice, governments around the world have a natural corollary to the proposition that full privatization should always be preferred to partial privatization. It is the maxim that state enterprises being divested through an asset sale should be sold, for cash, then the governments will choose the politically expedient course of selling SOEs to favored local buyers on concessionary terms, in order to avoid being charged with "selling the family silver to foreigners". This is a mistake on both policy and political grounds, since foreign bidders-particularly multinational companies- will usually make more capable and value- maximizing owners than will local champions, and by favoring the local bidder the government forgoes the opportunity to maximize sale proceeds.
1.1.4.5. Sale Methods
More than dependent on intelligence and knowledge of policy makers to chose the method of privatization, it is extremely relies on the announced or hidden aims of the politicians.
As Chong and Lopez-de-Silanes (2003) mentioned a clear and homogeneous privatization process should be established from the start and special emphasis should be placed on making the auction results as transparent as possible. In reality, however, only a handful of countries have followed this path. Many fail to establish 44
clear guidelines because their privatization programs were originally planned as small affairs or because they lack the necessary skills to do so. Alternatively, politicians may have strong incentives to create obscure and arbitrary privatization mechanisms that allow them to extract higher rents for themselves or their constituencies.
Although the privatization is a procedure including multilateral aspects and effect in different area of society generally in politic and economic, yet its main words should be heard in political language. The selection of any sale method highly follows the fact that it is implemented either as a long term economical strategy or short term political tactic? Short term political tactic has never shown up in any democratic governing system. However, it is traceable in countries with less degree of freedom and democracy. The under pricing is one of those syndrome which probably reflects the fact that privatizing governments pursue multiple goals rather than just revenue maximization (Boycko, Shleifer, Vishny, 1996; Biais and Perotti, 2002). No matter for which of these two reasons (strategic or tactical), but normally governments try to adopt or change the existed regulations in order to facilitate the implementation of their desired privatization method. Generally, pursuing different methods of privatizing state assets depends on the initial conditions of the country’s economy and the economic ideologies of the political party in charge. The whole process is often easy for small institutions, and becomes harder when it comes to find the appropriate buyers for larger enterprises.
Megginson (2005) named three major approaches through which governments commonly privatize the firms including: Share issue privatization (SIP); Asset sales to a single buyer (trade sales); Non-cash or “voucher” privatization.
The size of the firm is the main factor to choose between SIP and the trade sales. Megginson, Nash, Netter, Poulsen (2004) studied the determinants of the choice between asset sales and share issue privatization. They show that the choice depends on both the market institutions and the firm-specific factors. The smaller firms are sold via private markets (usually auctions) to a single buyer. This resolves the issue of separation of ownership and control which is especially severe in countries with 45
poor corporate governance and the larger and more profitable firms are more likely to be sold via public capital markets. Public market is more convenient for larger firms, since the lack of financial intermediation precludes buyers from raising sufficient funds to high amount payment. Better protection of property rights leads to a higher chance of asset sales privatization. Avoiding to describe all the worldwide known implemented sale methods it will suffice to briefly explain a few of them that been applied in developing and transition countries.
1.1.4.5.1. Sale to Private Investor
One of the main methods of privatization is the sale of state-owned enterprises to private investors. The state would simply decide which institutions should be privatized and through the use of market mechanism, private investors are able to buy shares of each firm. Stirbock (2001) submitted that the benefits from this method of privatization are that it creates badly needed revenues for the state while putting privatized firms in the hands of investors who have the incentives and the means of investing and restructuring. On the other hand, finding domestic investors in developing and underdeveloped countries is often a difficult task. Tax shield is one of the main elements to provide more attractive facility for private investor, both domestic and foreign type. When the government shows any transparent leniency to the investors such as permanent tax exemption, tax break or any other subsidies, indeed it interprets its protective position towards the investors rather than a given credit to accelerate the privatization. Errunza and Mazumdar (2000) also regarded this fact that tax write-offs may potentially be a factor for private investors (corporations) to bid for SOEs. This may be particularly true for foreign multinational corporations which may bid for SOEs to maximize their tax shields and also to diversify internationally. In particular, as foreign bidders to select investment either in their mainland or outside, they precisely consider the different elements
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related to the tax issue. And if they see a reasonable preference over investing as a foreign investor, then they are likely to bid higher.
1.1.4.5.2. Sale to the Public or Companies- Share Issue Privatization
Jones et al. (1999) named the period of 1980-1999 as “the climax of privatization” in which, governments from all corners of the world have obtained over $750 billion in proceeds from the divestiture of state-owned enterprises (SOEs) through “privatization” programs. Most privatizations have been direct sales of SOEs to existing companies (asset sales) or voucher privatizations. In recent studies of privatization especially through share issue privatization (SIP), a certain amount of attention has been devoted to identify the political nature of the privatizing government. Attention is mostly focused to demarcate the committed government from populist government. Perotti (1995) also Biais and Perotti (2002) foresaw that governments ideologically committed to privatization and economic reform, will deliberately underpriced SIPs and will privatize in stages to signal their commitment to protecting investor property right. Populist governments that are pursuing privatization strictly as a mean of raising revenue will be unwilling to underpriced as much as well committed governments. Populist government will also try to sell larger stakes in SOEs, since they will be unable to commit to not expropriating shareholders wealth. Thus retaining a larger stake would cause them to suffer more from the inevitable post-issue stork price decline that would occur once the government’s true intentions becomes apparent. Much of the under pricing of initial SIPs is a concession by governments designed to overcome the political obstacles that stand in the way of successful privatization and the economic benefits that might flow from it. Jones et al. (1999) came to this conclusion that, when a government sells a SOE via a SIP, it confronts a series of pricing and marketing decisions similar to those faced by corporate issuers. However, unlike a corporate issuer, a 47
privatizing government pursues multiple objectives that have both political and economic ends. In SIPs, however, the government is both the issuer and the regulator. The government’s dual role puts it in a position to affect the value of the firm after the sale. This exposes private investors to an information asymmetry - not about the value of the SOE’s assets - but regarding a government’s commitment to privatization. There are at least three factors more effective on the result of privatization including: uncertainty, under pricing and ownership structure. Without under estimating all the other factors, these three will be more discussed under the title of share issue privatization specially to compare the Iranian government’s behavior in privatization with the two types of committed and populist governments. Uncertainty: Perotti (1995) modeled “policy uncertainty” as an asymmetric- information problem in which investors are uncertain whether a government is “committed” to privatization or “populist”. Populist governments cannot resist the political pressure that arises, after privatization, to redistribute the firm’s value by either interference in operations, changing the regulatory environment, or reversing policy altogether. A committed government is as a provoker to signal its identity because: The sale of the SOE will yield higher proceeds if private investors believe the government is committed. The economic benefits of private ownership will begin immediately since managers perceive that committed governments will not expropriate the profits from their private efforts. The motivating economic benefits include the reduction of public interference in the allocation of firm value, the initiation of economic reform as the result of market discipline, the development of domestic capital markets, improved access to foreign capital, and raising proceeds for the government treasury. Together these are thought to benefit the performance of former SOEs as well as the aggregate national economy. 48
On the other hand, a populist government’s motives for privatization are: To raise issue proceeds To acquire the politically valuable option to redistribute firm value, after privatization. To misrepresent itself because perceived commitment would increase the issue proceeds and motivate managers to improve the privatized firm’s value, thus resulting in more value for redistribution. The potential economic benefits of privatization are not the motive of the populist government4 since it knows that it cannot support privatization in the future for political reasons. The initial sale of a small portion of a SOE signals that the government, as a shareholder, is willing to bear most of the redistribution costs associated with subsequent interference in the firm. Since committed governments do not plan to interfere in the future, they are willing to bear redistribution risk with associated with small partial sales. While, populist governments’ are too impatient to use small partial sales because their policy preferences will eventually come out so the subsequent sale price will be lower, and also the retention of a large stake by the government reduces the amount that can be redistributed through future interference. Under-pricing: If uncertainty about a government’s future policy is high then, private investors are likely to perceive that a small initial sale indicates the government does not intend to relinquish control. Convincing private investors that a government intends to relinquish control requires the sale of a large portion of a SOE in the initial offer. Perotti (1995) demonstrated that a government can sell a large portion of the SOE in the initial offer and still signal commitment through under pricing. The committed government is willing to accept the lower proceeds, which result from under pricing, because signaling commitment immediately initiates the economic benefits of privatization. A committed government values the benefits of privatization more than the lost proceeds. A populist government is unwilling to under price as much due to the lower issue proceeds, and because it knows the potentially 49
offsetting economic benefits will never materialize (due to a lack of commitment). Thus, a populist government will choose to sell a large portion of a SOE but under price little if at all. Biais and Perotti (2002) pointed out that some governments are unable to commit credibly to a market- oriented policy. A market-oriented government’s optimal privatization strategy is to under price shares in fixed-price offers and then rations the shares to median class voters. An advantage of the fixed-price offer method over book-building is its ability to generate demand cascades that increase participation in the offer. The underpriced shares are an inducement for median class voters to align their interests with those of the market-oriented government (Benveniste and Busaba, 1997). Under pricing in privatization may be politically beneficial for the government. Under pricing shares of SOEs encourages public participation in privatization, thereby building support for the reform. Mainly it is a political ploy to sell the shares cheaply to a large number of voters, hoping to reap their votes (Biasis and Perotti, 2002). Ownership structure: The ownership structure works to make privatization feasible as well as to resist interference and re-nationalization, or any other policy change that would compromise the equity stake of the median class voters. Thus, for governments that cannot credibly commit, the purpose of under pricing is not to signal but to establish an ownership structure that provides political support for privatization and private-ownership. In addition to building political support for privatization, these terms could help foster a culture of domestic share ownership, as well as establish a national or regional stock market. In fact no political system perfectly introduces the likelihood that some political considerations will be wealth reducing constraints. For example, powerful interest groups often can extract highly favorable SIP terms for themselves in return for dropping their opposition to privatization. Jones et al. (1999) documented that SIP offers share allocation, offer pricing, and
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control allocation terms that are consistent with governments structuring the offer to achieve political objectives. Jones et al. (1999) focused on the three following sets of interrelated decisions that a government faces while structuring a SIP when the privatization is a financial mean to political and economic ends: The control transfer decision: Should the SOE be sold all at once or through a series of partial sales with what fractions? The pricing decision: decision between under pricing and fixed price. The share allocation decision: the question about the investors, whether to favor one group of potential investors over another. As a result Jones et al. (1999) indicated that much of the under pricing of initial SIPs is a concession by governments designed to overcome the political obstacles that stand in the way of successful privatization and the economic benefits that might flow from it. They found that the returns of initial SIPs are positively related to the percent of a SOE sold in an offer, and negatively related to how populist is a privatizing government. Both mentioned sale methods of sale to the private sector and SIP are considered in privatization plan of Iran.
1.1.4.5.3. Sale to the Citizens by Voucher/Mass Privatization
Another widely used method of privatization has been known as voucher privatization. The government universally distributes vouchers to its eligible citizens which can be sold to other investors or exchanged for shares in other institutions being privatized. This method is also implemented in Iran under the title of Justice Shares Distribution (described in chapter 3). Although, this method does not create revenues for the government, it does privatize state- owned firms in a short period of time (Stirbock, 2001). Many countries such as Canada and Russia have employed this method, but the most notable voucher privatization program was the one designed by the Czech Republic. Due to the fear of the return of the communist party, the government felt that it was necessary to pursue a rapid privatization process. For a nominal price, 51
vouchers booklets were sold to the citizens who had the option of claiming a share in a particular firm or investing in the newly created investment funds. The purpose of the investment funds was to consolidate vouchers and diversify risk for the citizens. Furthermore, the investment funds were expected to motivate enterprise restructuring as the investment funds use the invested vouchers to obtain shares in particular firms. Although a large percentage of state-owned enterprises was privatized in short period of time, the overall process was not considered very successful due to “the lack of appropriate accompanying institutional policies and lagging banking sector reform” (World Bank, 2002). Megginson (2008) described mass privatization as a share distribution, boundless to all citizens and be the preferred method for privatizing large SOEs because SIPs offer the economic advantages of organized capital markets as well as potential political benefits such as the opportunity to develop support for privatization by preferentially allocating the shares to domestic voters. Despite the magnitude and impact of SIPs, the motivations for the terms selected by various privatizing governments are not well understood because the process is complex and relatively new. While a group of commentators were about the likelihood that mass privatization would succeed, the numerous practitioners of “forensic economies” have tried to explain why voucher privatization did not work and reason that voucher privatization did not yield any cash inflows, either to the firm or to the government, and thus there were no transfer of technology, capital, and expertise to the privatized companies. Also, the governments rarely surrender full control of important privatized companies to private owners either because the state retained significant shareholdings in the firm or because they deemed the firm too strategic to be left unsupervised. Finally, another negative side of mass privatization is its ineffectiveness because the government retained effective control of the banking sector in many countries. This continued politicization of the credit-extension mechanism insured that
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former state firm would continue to face state-owned banks for indefinite periods. Megginson (2005) and Megginson and Netter (2001) indicated that the exclusion of the foreign bidders raises substantial problems, especially in the case of mass privatization. And they emphasis when a government of post- socialist or developing country is about to privatize a large part of the economy in the absence of foreign bidders, because of the low level of wealth in the hands of domestic bidders, there will be no exhaustive competition offering higher price for the assets. However, it is not easy accepting the enthusiasm of foreign investor being partner with unlimited and unknown local shareholders as a result of mass privatization.
1.1.4.5.4. Sale to the Managers and Employees of the Firms-Internal Buy-Out
Stirbock (2001) explained that when state-owned enterprises are sold to managers (for an extremely low price) who are already familiar with the particular firm and its structure, although it may creates minimal revenues for the state. This method brings up some incentives but not stronger than when firms are sold to strategic investors. Additionally, new owners often do not have the resources to invest and restructure, which is badly needed in a large percentage of state-owned firms in underdeveloped and some developing countries. Generally, this process led to a lack of strategic investors, which may play a role in the limited success of privatization. Internal buy-out or management buy-out (MBO) also happens in cases like China where a big political objective is employment. This is one of the reasons to show that state control reduces efficiency because they do not let the firms to lay off excess workers based on economic considerations. But gradually government showed a tendency toward slighting their control and lay off excess worker as a mechanism of improved efficiencies for MBO firms. Therefore, Gan et al. (2008) conservatively indicated that among all above privatization methods, only management buy-out (MBO) had significant and
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positive impacts in improving performance in China, whereas other privatization strategies failed to clearly make such a difference.
1.1.4.5.5. Sale to the Original Owner-Restitution
There is another type of privatization method that has been employed in some circumstances, but is not used nearly as often as the three methods discussed earlier. Restitution is the process of giving the property rights of a company back to the original owner. Stirbock (2001) indicated that along with the difficulty of finding the original owner, there are many drawbacks to this method of privatization since the value of the company changes over time. This change is not always as a value increase and sometimes the condition of the firm is that much ruined that government has an interest to sell it in a negative value or at a zero price just to relinquish itself from challenging with the issues like the firm’s debts or its excessive employees. This method was applied in a few cases in Iran after the very vast revolutionary expropriation in 1979 with no noticeable results.
1.1.4.5.6. Sale to the Foreigner
In common, it seems that permitting foreigners to participate in privatizations increases the gains from both direct sales and SIP. Regularly in developing countries the foreign investors should inject external funds to the capital market, introduce and implement new technology, educate the staff and the costumers through well experienced management and entirely upgrade the mutual manner and expectation level between the costumer and service provider. However, its confirmation or refusal is a case by case issue, regarding the whole conditions of each privatization. Examples of privatization by participation of the foreigners in Hungary as well as the privatization in a group of Latin American countries are worth to mention in the discussion of foreign buyers. Hungary was the most indebted country in the region, in per capita terms, and therefore wanted to implement a
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speedy privatization process that would create revenues. The government opened up the sale of state-owned firms to strategic investors, including foreign ones. The result was an inflow of foreign capital, which led to much needed technological improvement and an increase in competition. The bank sector was a major target of foreign investors, resulting in the restructuring of the banking laws and regulations. Filipovic (2005) attributed Hungary’s good growth in the second part of the last decade to their method of privatization while revealed the importance of technological improvements and the benefits of advanced foreign technology. In the case of Argentina, Mexico, and Peru, Poole (1996) mentioned that each of those countries was able to create major revenues from privatization through selling to the foreigner. But they were not able to make an optimum benefit of that because instead of using the revenues to balance the current operating budget, the countries used it to pay off the outstanding debt. In both SIPs and asset sales, an important decision is whether to allow foreigners to bid. For an economist, the more open confronting with the presence of different bidders increase competition among them (either via SIP or in trade sales) which raise privatization revenues and eventually find more qualified buyer. However, foreign participation is often ruled out due to political or nationalistic or even ideological sentiment. Most of the time the incumbent bidders promote the sentiment to make the benefit from the absence of their foreign competitors. Sometimes the oppositions insist on forbidding the entrance of foreigners as a pressure put on the party in charge. Those countries with the low degree of freedom and corruption control are a paradise of privatization for pressure groups because, they are mostly a directly affiliated groups to the power in charge and can easily keep the domestic bidders silent and offset any of their efforts in the bids and in other hand shows their rigid objection to the participation of the foreigners to remain as a lone rider of the stage.
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1.1.4.6. Investor’s Returns
Return earned by investors is the issue of dual-interest of both the privatizer and the investor. Any government in its intention to publicize its privatization program should allocate a transparent and satisfactory space of providing data and information to the public and somehow promote the short term or long term return on invested capital by investors.
Although the investors should have sufficient knowledge of the rules of game in the capital market and it cannot be totally assumed the responsibility of the government, but however, as much as the public believe the honesty of government, then can rely more on the given data and information and be less hesitant of entering the privatization market.
Governments generally rely on share offerings as the best method of privatizing large state-owned enterprises, and they routinely adopt highly politicized offer terms in order to achieve political objectives. Offering terms that differ fundamentally from those observed in private-sector offerings, plus the very large average size of privatization issues, have motivated many researchers to examine the initial and long term returns earned by SIP investors. However, most of the time the initial returns earned by investors is the effect of under pricing the share offer at the primary stages.
There are many effective factors for long-run return of investors in the procedure of privatization. These factors are those, directly or indirectly increase the profitability of privatized firm and mostly terminates to increase in either share price or dividend. Upgrading the firm’s management, capital market development, economical and institutional reform are among factors with indirect effect on long-run return but, in many studies performance improvement is the most effective event after privatization to create the pave for long-run return of investors. But all of these factors do not negate the indirect impact of sale method and resulted ownership structure on the return of investors resulted from performance improvement of privatized SOEs.
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The importance of ownership in determining the efficiency of privatized SOEs is not less than the degree of competition with strict emphasis on full privatization (Vining and Boardman, 1997). Consistently Tian (2000) demonstrated that the performance of "private" enterprises to be significantly superior to that of "mixed" enterprises and Majumdar (1998) documented the efficiency scores averaging for private owned firms are significantly higher than SOEs. La Porta, Lopez-de- Silanes, Shleifer (2002) examined whether government ownership of banks impacts level of financial system development, rate of economic growth, and growth rate of productivity. They found that government ownership is extensive, especially in poorest countries, that these holdings retard financial system development, and restrict economic growth rates, mostly due to impact on productivity.
There are also studies on the indirect impact of sale methods with specific focus on the impact of SIPs on the long-run return for the investors. Among the examiners are: Boubakri and Cosset (2000) and Choi, Nam, Ryu (2000) documented significant market-adjusted return and even significant positive abnormal returns while some others like Aggarwal, Leal, Hemandez (1995) and Ausenegg (2000) stated a significant negative return. But Perotti and Oijen (2000) developed a theoretical model suggesting that long-run returns to investors in developing-country SIPs will earn excess returns if and when political risk is resolved.
1.1.4.7. Effective Status of Democracy on Privatization
Pondering the concept of democracy, draws a picture of government in which the supreme power is vested in the people and is exercised directly by them or by their elected and let them to benefit of free electoral system and privilege of equal political-social rights. There are so many characters and concepts lay in the term of democracy and among them, are many glittering terms such as property right, transparency, corruption control and freedom of speech or press freedom which all could have both direct and indirect effects on the results of privatization. Therefore, democracy as a protective umbrella to implement a successful privatization deals with many aspects as follow: 57
Reform: Although the privatization itself can be considered as a kind of political and economical reform yet, it also needs pre-reforms in different fronts.
To Dinavo (1995), democracy is the government of the people, by the people and for the people. He founded a positive relationship between capitalism and democracy and concluded that all the industrialized nations that hold economic powers, has the most committed democratic systems. Therefore, when the SOEs are privatized, no one individual or one class or one ethnic group will hold all the wealth and the revenues generated from those enterprises.
Wie and Xu (2002) found that more democratic countries with stronger pre-reform interest groups, namely, the financial services sector and the urban consumers, are more likely to reform. However, less democratic countries are likely to retain higher state ownership when such a governance mode yields a higher payoff for the governments, for example, when their fiscal deficits are high. Democracy appears to affect the pace of reforms by magnifying the voices of the interest groups in more democratic countries and by moderating politicians’ discretion in less democratic countries. A more democratic society provides more effective channels for its constituents to voice concerns and erects lower barriers for its constituents to organize interest groups.
Power division: Wie and Xu (2002) suggested that countries differ in the political structure through which constituents’ demands are heard, policy initiatives are articulated and debated, and policies are formulated and implemented. An important dimension of the political structure is the division of power that creates checks and balances in governance. In a more democratic country, opposition parties may have veto power in the policy-making process, whereas in a less democratic country, one party is likely to monopolize most policies. Furthermore, these veto players are more likely to have different ideological inclinations in a more democratic country.
Control: In defining the relation between democracy and privatization decision, Wie and Xu (2002) indicated that democracy, by itself, does not have much effect on the 58
privatization decision but, it does lower non-state ownership in high democracy countries. Since low-democracy countries have less credibility in implementing reforms, they may have to offer more shares for sale relative to high-democracy countries in order to signal their commitment to reforms. Democratic countries with a strong presence of pro-reform interest groups indicated by a larger financial sector, a greater proportion of urban consumers, are more likely to privatize or liberalize. Less democratic countries whose governments may benefit more from controlling the sector directly because of high budget deficits, are more likely to retain higher state ownership. The policy outcomes are endogenous and determined by the interplay of the configuration of private interests, government interests, and the political structure and these institutional variables take time to change in most countries.
Corruption: The country’s democracy generally is classified by international agents as a low, mid or high democracy. There are so many characters and concepts laid in the term of democracy and among them a glittering chain of freedom (human right), transparency, corruption control and property right which is the fundament of privatization. The distinctive parameter for evaluation of democracy is measuring the score of freedom in each society. As far as the score of freedom goes up, the amount (percentage) of corruption control goes done.
Chile is a good example while its score of freedom is one as the highest score, similar to US and Canada and the percentage of its corruption control is 90% then, Kikeri et al. (1992) compared the success of privatization in Chile as the same level as New Zealand and UK by considering its privatization were accompanied by reforms to open markets and encouraging the development of private sector through free entry. In most of the privatization in Chile the winners were consumers, labors, government and buyers and increase of productive efficiency.
Transparency: Transparency is one of the democracy’s fruit while it is one of the most important necessitations of economic reform including privatization. Building and institutionalizing the transparency within the whole structure of privatization should be a top priority for all policymakers undertaking the effort. Transparency is 59
the demand of all the non rented investors as the privatization participants. Although, complete transparency is not easy to achieve, nor do most governments always regard it as desirable but nonetheless, it cannot be ignored. A government that shows utter disregard for transparency will appear dishonest and untrustworthy that results less attraction for non rented participants of privatization with more space instead, for the rented and pressure groups. The quest for transparency is a difficult balancing act and governments must maintain enough access to information to satisfy investors and observers, while retaining enough flexibility and privileged information to allow it to conduct privatizations quickly, fairly and well.
In 1998, Adam Smith Institute did an implicit study on different aspects and fronts between transparency and privatization. Findings indicated that any transparent sale in privatization has to enjoy at least the followings characters:
Competitive bidding- to make the market sure of no hidden favor or any pre- agreement.
Equal access to information- to enable the investors submits their bids with a sound understanding of the enterprise.
Clear evaluation criteria and documented procedures- to reassure potential investors that all will be fair and accessible.
Disclosure of the purchase price- As a common practice after the sale.
Adequate monitoring- to convince the press and opposition politicians.
Compliance with the law- to keep the government honest and out of courts defending after privatization.
In the matter of different rate of transparency within the sale methods Meggonson (2005) indicated governments should generally favor share issue privatizations over
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asset sales whenever there is a choice of selection as SIP is inherently more transparent and less subject to the corruption than any other sale method.
Property right: Property right is another product of democracy establishment. Property right is one of the two core fundaments (ownership and control) in privatization. Mankiw (2001) stated that competitive markets, in which transactions are effectively handled by market prices, rely heavily on formal, well-defined property rights. The lack of property rights limits the amount of goods and services that can be exchanged in the market. An important implication of well-defined property rights is that it creates strong individual incentives, which, is a significant factor in the quest for long term growth. De Soto (1996) argued that any country faces the lack of formal property rights there is “the missing ingredient” that is keeping the country from sustaining long-term growth. Because by creating strong incentives, property rights lead to an increase in investment since people are certain and secure about the ownership of their property. Finally, property rights give people an incentive to pursue long-term rather than short term economic goals.
All in all, indicates that the symptoms of democracy are in a chained reinforcement relation. Any kind of strong or weak presence of each symptom can be generalized to the others.
Causatively, to have a related general view of Iran in this matter, it is notify able that the press freedom in Iran was ranked by the World Press Freedom Organization (2010) as one of the ten most worst within 169 countries in 2009. The Reporters without Borders Organization (2010) ranked the Press Freedom in Iran as the 166th within173 countries in 2008, the 172th within 175 countries in 2009, and with more downward trend indications for 2010. Finally the Freedom House ranking showed Iran as the 18th from 19 countries in the region of Middle East and North Africa (MENA) and the 187th from 192 countries all over the world both in the category of “Not Free” from the view point of press freedom.
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1.1.5. Data and Records
Certainly, the most dramatic privatization experiences have occurred in transition countries where socialist economies have been become predominantly privately owned within a decade. Yet, other countries have also pursued impressive privatization programs; moreover, as much of post-communist privatization was non-cash-based, developed countries and other developing countries easily surpassed transition economies in terms of privatization revenues. Guriev and Megginson (2007) in their empirical studies indicated that, since 1984, the share of state-owned enterprises (SOE) in the GDP of industrialized countries has fallen by almost half, to less than 5 percent. The change was even more substantial in the developing countries so that according to Sheshinski and Lopez-Calva 1999, between 1980 and 1997, SOEs’ activities as a percentage of GDP decreased from 11 to 5 percent in middle income countries, and from 15 to 3 percent in low income as shown in Fig.1 with regional breakdown.
Fig. 1: The Share of SOE in GDP by Region
Source: Figure 1of Lopez-de-Silanes, 2005
The change in employment was even larger. In the middle-income countries, SOE employment has come down from a peak of 13 to about 2 percent of total while in low income countries employment in state enterprises has dropped from over 20 to about 9 percent.
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Fig. 2: Worldwide Revenues from privatization 1988-2008
Source: Privatization Barometer, the Annual BP Report of 2008, 2009
The worldwide revenues (Fig. 2) dramatically rose from 1988 to 1997 and remained in a same good level till 2000 and thus, its down ward trend was not because of decrease in the revenue but because of decrease in the volume of privatization. In other words, there were remained very few enterprises in developed countries to be privatized and gradually the transition countries even before Latin Americans joined a very close level as developed countries because of a well privatization coverage for their SOEs.
Most studies suggest that privatizations have led to significant increases in firms’ productivity and profitability as reported by Megginson and Netter (2001), Djankov and Murell (2002), Lopez de Silanes (2005), Nellis (2005) and Megginson (2005) and the examples are for instance in the UK (Martin and Parker, 1995) and in China (Wei et al., 2003). The same conclusion has been reached by multi-country studies that employed samples of firms privatized in developed countries by Megginson et al. (1994), developing countries by Boubakri and Cosset (1998) and East European countries by Brown et al. (2006). However, few papers have tried to analyze the sources of the observed privatization performance improvements like Boubakri et al. (2005) and D´Souza et al. (2005).
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1.1.6. Justification of State-Owned Enterprise VS its Inefficiency
During the last three decades there have been shown up so many logical, reliable and practical answers to the necessity and advantages of privatization. There are, of course, numerous theoretical analyses that have addressed issues related to state versus private ownership. These studies either favored state ownership or were inconclusive or even double-entendre. The exceptional hesitations only arise when some privatization failures are taken as a pessimist model. And opposite position towards privatization is taken up when there is no positive motivation for the policy makers due to result of the trade -off between cost and benefit they may bear or gain in privatization. As a whole, at this stage the obligation of magnified looking at some aspects of state ownership seems reasonable.
To Megginson (2005), State ownership can arise for any of five generic reasons including:
It can emerge as a natural extension of royal power in feudal or Tribal societies. It can emerge as a means to commercialize complex and/or expensive new technologies. State often nationalize failing private businesses, either to preserve employment or to continue producing essential goods and services, or both. Ideology- largely explains the rise in state-owned enterprises in the past- World War II era (high limitation from Communists sides and liberation from Social –Democrat Governments sides). Extreme political factionalism. In societies that are fundamentally divided by race, class, religion, or ethnicity, state ownership of key enterprise provides vast opportunities for the group in power to punish the other groups and favor its own members.
Guriev and Megginson (2005) noticed some of those critics or better say, weaknesses on the ground of privatization as:
Privatized firms do not perfectly mimic private firms.
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If the root cause of poor state-owned enterprise performance was an institutional environment that hampered voters from holding politicians accountable, then privatization will be as prone to error as SOEs’ management. Under developed capital market, weak court systems, inadequate procedures for bankruptcy or takeover will prevent privatized firms from performing efficiently, especially in developing countries. Privatized firms in transitional economies will be less efficient if they were sold to their managers and workers, since this may prevent necessary restructuring and limit capital infusion.
On the other hand, less competition, greater political intervention and weaker corporate governance are strong theoretical arguments against state ownership considering that privatization will not necessarily cure these ills. Political objectives, poor information, and principal agent problems can compromise the privatized firm in ways that keep it from performing as well as a de novo private enterprise. However, empirical evidences suggest that, while privatized firms may not be identical to private firms, they are usually superior to SOEs.
Megginson (2005) and Guriev and Megginson (2005) counted some ideas and logics that justify the state ownership as follow:
To ensure that business enterprises balance social and economic objectives, rather than focusing exclusively on profit maximization. Response to significant market failures- particular by the challenges posed to economic efficiency by natural monopolies and as a method to internalize productions externalities such as pollution. Proponent assert that public ownership can be justified under certain conditions involving informational asymmetric between principal and agent, where complete contracts cannot be written and enforced.
But any idea about justification of state ownership can be transferred to an ambiguous circumstance when it is supposed to be accountable towards the subject of inefficiency. However, inefficiency in state owned enterprises does not mean that private or privatized
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firms are acquitted of this characteristic. In summary, Megginson (2005) counted four principal reasons of less efficiency for SOEs as:
SOE managers with weaker and/or more adverse incentives than private firms’ managers will be less diligent in maximizing revenues and (especially) minimizing costs. State enterprises subject to less intense monitoring by their owners because the owners bear all the costs of doing so but reap only a fraction of the rewards- and because there are few efficient methods of effective disciplining SOE managers when they commit an error. The politicians do not commit to bankrupting poorly performance SOEs, or even to withholding additional subsidized funding, so state enterprise inevitably face soft budget constraints. SOEs have an inefficient design, since they are being created specifically so that politicians can use them to benefit their own supporters at the expense of another group in society.
Different studies have recognized many factors that directly or indirectly affect the efficiency of the state owned enterprise and those are more in vogue will be discussed in this part.
1.1.6.1. Inefficiency of SOEs due to Weak or Adverse Incentives
It is easy to find out how to arrange the incentives of entrepreneurs or hired executive employees to manage a private firm in a way to maximize the owner’s wealth so that they benefit of any step taken towards it. Shleifer (1998) stated that these incentives to minimize costs, improve qualities, and innovate new products are the true explanation for the “dynamic vitality” of free enterprise, and thus of capitalism’s inherent economic superiority over socialism. These incentives are made even sharper in the typical case where private are not protected from competition, as Hayek (1994) asserted that competition promotes operational efficiency both through the incentives effect described above and by revealing information about production costs and market clearing prices to all industry observers. Most often, remaining at the taken
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position (state manager) is the main incentive that any state manager may face. This is greatly different from what incentive means to the private managers while the incentives are appropriately based on the anticipated performance and shareholders satisfaction.
Schmidt (1996) explained when the state-enterprise managers, who alone know the firm’s true production casts, and who understand the government’s incentives to subsidize production, will thus have very little incentives to control casts internally. Therefore, the governments will adopt privatization primarily as a means of committing not to subsidize SOE production.
Laffont and Tirole (1991) noted that because managers of public enterprises own no stock or stock options in their firms and are not subject to corporate takeovers that could cost them their jobs they typically have less incentive than private managers to adopt a sufficiently long-term perspective focused on productive efficiency.
Dixit (2002) found state- enterprises managers have very weak incentives to pursue efficiency because they are required to serve multiple masters. As political creations, SOE are accountable to several constituencies with different objectives. In comparison with private firm managers, who must satisfy only shareholders, SOE managers must strive to satisfy many competing interests and perform multiple tasks and these features in state enterprises cause weakness of incentives. Therefore, if the alternative for SOE’s employees is to work with private sector, where marginal incentives are more powerful, those employees are less averse to effort or risk, or have higher ability, will go to choose the private sector. Again this abandon of manpower will be another loss game for the state managers and as a corollary, state managers will thus also face weak and diffuse over sight, which is another problem commonly ascribed to state enterprises.
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1.1.6.2. Inefficiency due to Inadequate Monitoring
Citizens should be assumed as the main but not qualified shareholders of state enterprises. They have an unwanted shareholder position and because of the variety in the nature of the state enterprises they cannot act as a specialized shareholder. These dispersed owners have a very poor incentive and very rare chance to spend money or to have a permission for auditing the financial performance and monitoring SOE managers since any individual monitor (by any citizen as a shareholder) must bear all the search and information costs of supervising public managers, but the benefits of effective monitoring must be shared with the entire (thankless) citizenry. This personal mission is that much hard and sometimes dangerous that mostly is the reason to pull backs more than push forward. In addition the citizens as SOE’s shareholders can never sell their so called shares and in other hand they are sure the state enterprises are rarely allowed to go bankrupt. Putting aside the citizens, even those politicians with society’s interest at heart has a very weak incentive to invest the time and effort required to discipline SOE managers, since the cost of doing so will surely be very large whereas the electoral payoff to industry improving enterprise performance will likely be quite low.
Clarke and Cull (1998) summarized the above and indicated that monitoring is, however, one reason to expect private firms to perform better than state-owned enterprises. Private enterprises owners prefer to have a clear and scheduled contract with their managers which result job security to encourage the managers not to miss the mid-term and long term projects with high return. But when the managers in SOEs do not benefit of mentioned credits and by constant chance of quick and unpredictable hiring and firing, they prefer an involvement in short term projects with short term return.
All aforesaid lead to conclude that State enterprises have none of the key characteristics of private firms such as specialized ownership, worrying about the share price, possibility to appoint qualified management, setting any target or plan and at last, monitoring the performance of the managers. 68
1.1.6.3. Inefficiency due to the Soft Budget Constraints
Megginson and Netter (2001) argued that managers of less-prosperous state firms know they can rely on the government for funding and leading to soft budget constraints (SBCs). In real life, the state is unlikely to allow a large SOE to face bankruptcy, thus the discipline enforced on private firms by the capital market. If the managers of a private firm are not operating efficiently, they will be replaced either by the current shareholders or as the result of a hostile takeover. If a private firm cannot compete effectively, suppliers of capital will cease funding the company’s operations-and in the extreme the firm will be forced into bankruptcy and liquidated. What are the equivalent public sector disciplinary tools? Empirical evidences suggest that SOE managers are rarely punished individually for poor performance and in fact have little reasons to fear punishment for inefficiency. But what about withholding of capital resources? There is not enough indication that even hard budget constraints (HBCs) imposed by a government on SOEs effective either (Vickers and Yarrow, 1988).
Kornai (1988,1993, 2000), Berglof and Roland (1998), Lin, Cai and Li (1998) Frydman, Gray, Hessel, Rapaczynski (2000) all suggested that soft budget constraints (SBCs) were a major source of inefficiency in Communist firms, and that these SBCs have continued through much of the post-communist transition period. However, SBCs are not limited to transition economies. Sheshinski and Lopez-Calva (1999) asserted that public ownership inevitably leads to SBCs. They present a simple model showing that governments will choose to extend subsidies to failing state enterprises whenever the political costs of allowing a SOE to go bankrupt outweigh the political costs of subsidization. In addition to inhibiting efforts by politicians to impose HBCs, this fear of financial distress can also preclude initiatives to force state enterprises to restructure, or to open monopolized industries to private-sector competition. Since large SOEs are too big and too politically important to fail, their very weakness protects them from the type of effective discipline to which private firms are continuously subjected.
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Much of the empirical evidences on SBCs examines whether it is in fact possible to impose HBCs on loss-making SOEs and, if so, whether this improves corporate performance. Numerous articles examine whether SBCs are a problem in transition countries.
Megginson (2005) and Guriev and Megginson (2007) reviewed and summarized studies focused on the consequences of implementing the SBCs on SOE especially from efficiency point of view, versus the advantages of implementing the hard budget in private sector. As they noticed, a very important study of the effects of SBCs in transition economies is Frydman, Gray, Hessel, Rapaczynski (2000) who examined whether the imposition of HBCs is alone sufficient to improve corporate performance in the Czech Republic, Hungary and Poland. They found that the threat of HBCs for poorly performing SOEs falters, since governments are unwilling to allow these firms to fail. The brunt of SOEs’ lower credit worthiness falls on state creditors.
Bertero and Rondi (2000) examined whether imposition of a HBC can improve SOE performance. They exploited that the SOE firms’ responses to increased debt during the HBC period, 1988-93, is consistent with financial pressure, but is not during the SBC period of 1977-87. In other words, when HBCs can be credibly imposed on SOEs, they do promote greater efficiency even in the absence of ownership changes.
Lizal et al. (2001) submitted that cooperatives and small firms are credit rationed and SOEs operate under a SBC.
Coricelli and Djankov (2001) identified the presence of SBCs and analyze their impact on enterprise restructuring in Romania during the initial transition period. They found that HBCs do promote passive restructuring, in the form of labor shedding, but not new investment. Active restructuring requires access to external financing. Tightened bank credit can induce HBCs and raise enterprise efficiency in the short-run, but at the cost of curtailing investment.
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Cull, Matesova, Shirley (2002) examined the incentives that managers of voucher- privatized Czech companies have to “tunnel” (strip assets out of companies at the expense of outside shareholders) and “loot” their companies. Looting occurs when firms face a SBC and managers are able to borrow heavily, extract funds from the firm, and then default on the debt without penalty. Controlling for size, industry, capital intensity and initial leverage, they find that voucher-privatized firms perform significantly worse than firms with concentrated ownership that had to be purchased for cash.
As many authors, Sheshinski and Lopez- Cavala (1999) asserted that public ownership inevitably leads to SBCs, with presenting a simple model showing that government will choose to extend subsidies to failing state enterprises whenever the political costs of allowing a SOE to go bankrupt outweigh the political casts of subsidization. Yet, SBCs does not make sense in private sector although they are always looking for any low rate loans or any other financial facilities available in capital market.
In addition to inhibiting efforts by politicians to impose HBCs, this fear of financial distress can also preclude initiatives to force state enterprises to restructure, or to open monopolized industries to private-sector competition. Since large SOEs are too big and too politically important to fail, their very weakness protects them from the type of effective discipline to which private firms are continuously subjected.
Schaffer (1998) resulted that change in ownership is not enough to improve macroeconomic performance. The gains from privatization come from change in ownership combined with other reforms such as hardened budget constraints as well as an effective legal and regulatory framework. Enforcing of HBC is one of the certain result of privatization which has a marked different on corporate performance in encounter of imposing of SBC. Frydman et al. (2000) emphasized that this different being aggravated when the procedure of privatization is preceded through foreign investment. HBC has also a counter effect with market liberalization,
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elimination of pricing control, firm’s debt ratios and elimination of various support mechanism.
1.1.6.4. Inefficiency due to Partial State Ownership
Errunza and Mazumdar (2000) stated that when both cash flow rights and voting control rights pass from government to private hands, that causes the total change in incentives of how to run the firms. Therefore, because of complete utilization of private sector’s incentives, it is critical if the government retains even a minority voting stake in the firm after privatization. The efficiency gains from privatization may emanate either from degree of potential monopoly power that is realized by the private owners after privatization or from operational efficiency gains due to superior managerial efforts by the new management. Clearly, such a change is not possible to be implemented by the new private management unless corporate control is handed over from state manager.
Such an assumption is validated by Megginson et al. (1994) to state that share privatizations lead to efficiency gains only when the government completely relinquish its voting control and transfer it to private hands. No such efficiency gains are noted when the government sells shares in the SOE merely to raise capital without relinquishing control.
Holmstrom and Tirole (1989) suggested however, when the state retains ownership of a relatively large portion of a privatized enterprise, the resulting market for its shares may become illiquid. Speculators may shy away from such shares thus garbling the signal about the firm’s future performance contained in its share price. In those instances, the disciplining effect of capital market monitoring may be less effective than if the firm’s shares were entirely in private hands.
Finally, Clarke, Cull (1998) noted that when the state retains control of some of a firm’s shares; in those instances, partial state ownership may be compatible with the disciplining effect of capital market monitoring.
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1.1.6.5. Inefficiency due to Pursue Non-economic Objectives
Numerous researchers including Shliefer (1998) and Shirly and Walsh (2000) noted that SOEs can be remarkably effective tools of redistributive politics, since state firms answer to political masters rather than the market, wide divergence from profit- maximizing behavior are not only possible, they are in fact desired. The main mission of state managers is move towards what has been undertaken by the politicians and what will guarantee their popularity within their voters. Overstaff, overproduction and overpayment as the clear signs of noneconomic objectives can be easily ignored in state enterprises when they could cover personal interests of politicians and their managers are placed in a safe margin of no fear of bankruptcy, no care about market situation, no attempt for competition and no consideration about quality of production or provided services. One of the most criticisms on the poor efficiency of SOEs emanates from misallocation of resources. Misallocation is what happens in the purpose of overproduction order to maximize employment for political reasons. Over- staff and over-production usually appear as incentives for the governments but not for the private sector that profit is its top priority. This is the reason why the several empirical studies strongly conclude that a firm’s transfer from state to private hands prevents such a misallocation at least in the area of employment and production line and volume. Private sector pursues profit rather than non-economic objectives. Any success in private sector is clearly relied on the constructive efforts of the shareholders in appointing qualified managers, monitoring the whole operation through well defined controlling structures, caring about any deviation in any planned aspects, utilizing and implementing the latest of the industry and the market as much as possible and finally injecting money whenever it is required.
1.1.7. Designing the Strategic Privatization Program 1.1.7.1. Key Questions at Pre-design Stage
There are some key regulating issues facing a privatizing government. Before any pivotal privatization planning, however, a government must ask and answer a series of important questions regarding the regulation of the divested company since a 73
government cannot simply sell of the national wealth and exonerates itself of the sequences. All governments must pass enabling legislation and create a new regulatory authority either before or immediately after privatization. However, creating an effective regulatory regime is neither simple nor easy.
Among the basic issues that all privatizing governments must address, Megginson (2005) pointed the followings:
Should the monopoly provider be broken up before privatization?
Should the new private owners be granted an exclusivity period when they will not be subject to new competition or, should the competition be allowed immediately after the initial sale?
If the competition desired, how can this competition be encouraged without inflicting severe damage on the incumbent operator, which often bears large “legacy” casts of standard assets and excess labor?
Should the company be sold directly to a private operator in an asset sale, or should the company be sold to investors through one or more public share offerings?
If foreign investors are allowed to participate, how can the enduring national interest are protected under foreign ownership?
What power should be given to the new regulatory body?
How can it be ensured that the new regulatory body will judiciously weigh the interests of consumers versus producers, and not be captured by the incumbent operator?
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How can it be ensured the private providers have the wherewithal and incentive to undertake the capital investments needed to expand and improve service?
Most important of all, how will be the prices for basic services are set, and who will have the power to change these prices?
Although economists have theoretically “correct” answers to all of these questions, the real world of political economists renders all this choices different. First, policy makers must choose between maximizing sales revenue at the time of privatization and maximizing economic efficiency afterward. Second, privatizing governments must choose between protecting the interests of the privatized incumbent and protecting consumers and ensuring that citizens gain access to the full range of privatized industry services at the lowest possible price.
1.1.7.2. Optimal Design
Very little research has examined how governments choose to sequence the sales of particular companies and most of what has been written in normative (what should be done) rather than analytical (what has been done, and why) in nature.
Megginson (2005) stated that most governments seem to pursue a common sense strategy of selling of the financially healthiest SOEs first, since this can be done quickly and with relatively little need for pre-sale restructuring. As programs evolve, most governments then move on to selling core service companies, typically beginning with telecommunications providers, then electric utilities, and only later water and sewerage companies. These large enterprises are typically sold in stages, with many months or even years separating sale tranches for specific companies. However, there is little in the theoretical or empirical literature to guide policy makers regarding how much of a particular company should be sold in one tranche versus in later sales, or can economists yet offer much guidance about sequencing the sales of different industries, or even specific companies within a given industry.
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As described by Megginson (2005) these are vital institutions in all economies, and state-owned banks often dominate (or monopolize) the financial sectors in many countries yet, seemingly it is not easy to answer simple question such as whether recapitalize a state bank before selling it off or whether to sell all state banks at once or in sequence. There also can offer far too little guidance to policy makers who are trying to balance banking-sector restructuring with promoting development of stock and bond markets, even though this is an issue that many countries-particularly China and India-are now struggling with.
To Kikeri et al. (1992), privatization works best when it is part of a larger program of reforms promoting efficiency. By reforms means; open markets, remove price and exchange rate distortions, and free entry for private sector. Revenue maximization should not be the primary goal of privatization. Far better to eliminate monopoly power and unleash potentially competitive activities than to boost the sales price by divesting into protected markets. And, more better to create regulations to protect consumer welfare than to maximize price by selling into an unregulated market. They also commented that regulation is critical to the successful privatization of monopolies. The sale of Chile Telecom was a good example when the productive efficiency of the company increased as a result of a well-developed and well- administered regulatory framework. Additionally, countries can benefit from privatizing management without privatizing the ownership of assets. Management contracts, leases, and concessions have been successfully used the world over, particularly in sectors where it is difficult to attract private investors.
The sale of large enterprises requires considerable preparation. Successful privatizations of large enterprises have entailed breaking them into competitive and marketable units (contrary to Iran that 55% of the total shares of Iran Telecom was sold at once), bringing in dynamic private sector managers, settling past liabilities, and shedding excess labor. Successful privatizing governments also assiduously avoided large new investments for plant modernization and equipment, since getting
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the private sector to finance and manage these investments was itself a major reason for privatization.
Kikeri et al. (1992) emphasized that transparency is critical for economic and political success. The sale of enterprises needs to be transparent by adopting competitive bidding procedures, developing objective criteria for selecting bids, and creating a clear focal point with minimal bureaucracy to monitor the overall program. A lack of transparency can result in political backlash, or even bring the process to a halt. Governments must pay special attention to developing a social safety net. In many countries-most recently in Eastern Europe and Central Asia-employee ownership schemes, unemployment benefits, and retraining-redeployment programs are being developed to ease the social costs of privatization. Finally, in changing the public- private mix in any type of economy, privatization will sometimes be less important than the emergence of new private business. Countries can freeze or restrain the expansion of public enterprises and encourage the growth of a dynamic private sector through free entry.
1.1.7.3. The Constraints
Prokopenko (1995) provided an explicit collection of barriers and constraints as listed below:
National economic uncertainty and instability
Political ambivalence towards privatization
Opposition from powerful interest groups
Limited demand and weak financial markets
Management and employee resistance
Bureaucratic complexity and delays
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Weaknesses in market-economy management skills
Uncertain or incomplete property rights
An important question brought forth by Guriev and Megginson (2007) was if the general lesson from privatization research is that privatization usually works, how should one explain the failure of privatization in Russia and other CIS countries? The evidences suggest that privatization succeeds but only if the relevant institutional environment like private property rights protection, rule-of-law, HBCs, competition and regulation are in the place. The next indication for optimal design of privatization relates to the sale method. Guriev and Megginson (2007) indicated that non-cash privatization is inferior to trade sales and share issue privatization. The intuition is straightforward. First, non-cash privatization results in insider ownership, which implies that demand for institutional reforms develops very slowly. Since market institutions are not in place, secondary market trading results in ownership concentration in the hands of a few politically connected owners. The larger the insiders’ ownership stake the more they are protected from expropriation and regulation, and the more market power the company has. Consequently, in Russia, Ukraine and other CIS countries the post-privatization redistribution results in economic domination by a few large business groups. The role of these so called “oligarchs” is not clear. On one hand, they improve performance of their own firms and provide the only counterweight to a predatory government. They also represent the only significant constituency for whatever pro-market institutional change might take place (e.g.: Russia). On the other hand, their dominance subverts institutions in their own favor at the expense of competition policy and entry of new firms (Guriev and Rachinsky, 2005).
The other implication of non-cash mass privatization is the resulting fragility and ambiguity of private property rights. As the owners have paid relatively little for the assets, voters believe that privatization is not fair and the politicians can always find support for expropriation; this risk undermines incentives to invest.
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1.1.8. Concluding Remarks
1- The definition of privatization is the process of transferring an industry or activity from government ownership to the private sector. Its gist mainly relies on understanding the concept of property rights (Filipovic, 2005). 2- The concept of privatization mostly argues for rebuilding the countries treasury, decreasing the size of government incumbency and costs, quantitative and qualitative improvement of services and production without appropriate and economical expenses or efficiency and most of the time as a step ahead towards free market. 3- The objectives of privatization include revenue collection; promotion of efficiency gains; reduction of government interference; development of capital markets; widening of share ownership; introduction of competition and exposure to market discipline (Errunza and muzomdar, 2000) or raising money, help to develop national capital market, inherently better management and more efficient of private owned companies than SOEs (Megginson, 2005). 4- The nature of privatization is political. Politicians trade off their costs and benefit to make any decision for privatization (World Bank, 1995). 5- The process of privatization causes less chance for the government to negatively impact the economy and the downsizing aspect of privatization is an important one since bad government policies and government corruption can play a large, negative role in economic growth. 6- Privatized firm is a copy of private firm with a distinct and considerable differences with the origin (Stiglitz, 1999a) but it is usually superior to its original version when it was state owned (Megginson and Netter, 2001). 7- It is better to privatize well rather than privatize quickly and the easiest and least controversial sales should be executed first (Megginson, 2005). 8- Governments are not good at restructuring firms and even labor force retrenchment programs are counterproductive (Chong and Lopez-de-Silanes, 2002, 2003). 9- Before privatizing any large SOE, it should be broken up into smaller operating companies either to better engender competition or to make the newly private firm more responsive to market forces, or both (Gurieve and Megginson, 2007).
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10- A clear and homogeneous privatization process should be established from the start and special emphasis should be placed on making the auction results as transparent as possible (Chong and Lopez-de-Silanes, 2003). 11- Democracy is an important factor in the success of privatization because of its main role in formation and establishment of transparency (Kikeri et al., 1992). 12- A free market economy largely depends on well-defined property rights in which people make individual decisions in their own interests (Filipovic, 2005). 13- Principle inefficiency reasons for SOEs are: managers’ weak/adverse incentives; inadequate monitoring; rely on SBC; resource misallocation; noneconomic objectives; and partial state ownership. 14- Private management is much more effective and important than private ownership (Kikeri et al., 1992).
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1.2. Chapter Two: PRIVATIZATION AND INTERACTIONS REFORMATIVE IMPACTS EXPERIENCES 1.2.1. Chapter Summery
The literature review presented in chapter one described previously published work that has investigated the different general aspects of privatization. As a result of this review, number of areas was chosen as the focus for work in this PhD project.
Firstly, it was noted that there are many major consideration at pre-privatization stage including re-structuring. This issue was therefore chosen as one of the basics of privatization success related to the subject of this thesis.
Secondly, a number of specific issues cause inefficiency to be investigated in privatized banks of Iran.
Thirdly, it was noted what are the key-points in optimal design of privatization and the constraints.
This chapter considers a number of issues pertinent to the political and economical debates of privatization. Then, it also reviews the privatization interactions with corporate governance and capital market.
Finally, the worldwide experiences present some lessons to be compared with the results of privatization in Iran.
1.2.2. Interaction of Privatization with Political Economy 1.2.2.1. Political Argument
World Bank (1995) suggests that politicians usually privatize a firm when the political benefits of privatization- increased revenues for spending on constituents, elimination of a poorly performing SOE that has become a political liability-outweigh the political costs- layoffs of constituents, price increases, and end to services or subsidies for favored groups. Shleifer and Vishny (1994) suggested that privatization 81
occurs when politicians who benefit from low taxes win out over those who benefit from subsidizing supporters. The politicians use public enterprises to pursue their own political goals. One straightforward way to do this is to give redundant jobs at state-owned enterprises to political supporters. Even the design of privatization is also affected by a country’s political institutions, for example, by electoral laws that determine politicians’ time horizon and the strength of political parties or by constitutional provisions that determine the number of political actors who can veto the privatization policy or the likelihood that the policy will be sustained through changes in leadership. Nevertheless, case studies, especially in the area of bank privatization do suggest certain regularities in the interplay between privatization and politics.
A political economy approach is particularly useful in understanding why and how governments privatize. The timing of divestiture is affected by the existence of political institutions curbing the bargaining power of veto players and enhancing executive stability. Privatization methods seem shaped by political preferences and the degree of political fragmentation affects significantly the timing of privatization. In more fragmented democracies the “war of attrition” among different veto players delays large-scale privatization. Privatization methods seem strongly affected by partisan politics. Particularly, the executives with re-election concerns design privatization to spread share ownership among domestic voters (Bortolotti and Pinotti, 2003).
The World Bank (1995) has formulated the political requirements for a successful privatization as: desirability for the political leadership, feasibility, the possibility to create support for the policy, and credibility, that is, no easy policy reversal. Although, privatization is considered as a pre-condition for economic growth but, Kira (2004) did not support this assumption and his model resulted that not only the privatization is not the prerequisite to the economical reform but also privatization is more efficient in countries with a developed economic environment. And privatization cannot be the panacea for efficiency problems in the state-owned sector.
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Wrong incentives can distort the privatization outcome in a way that makes this measure undesirable.
Focusing on the type of governments, when the political leaders are voter-oriented, they may privatize too much when higher employment under restructuring does not substantially increase the expected income of the voters. They also go for under pricing to use privatization as a way to “buy” voters.
Kira (2004) indicated that egoistic governments have inefficiently high incentives to privatize due to their profit orientation. This makes them neglect the positive aspect of employment that is higher under restructuring. Actually this result is on the contradiction with the findings of Boycko, Shleifer, Vishny (1996) when they implied that self-interested governments have no incentive to privatize because the leadership of this type of government is interested in a high employment level. This conclusion is close to the finding of Clarke et al. (2004) demonstrating that in developing countries, large and overstaffed SOEs with high levels of both unemployment and public sector employment are less likely to be privatized, and the strength of political opposition is also a key determinant of outcomes. Additionally, overstaffing and a high level of public employment are signs that a government is not responsible to the full electorate, but only to a narrow set of favored constituents. Pointing to the recent research on public and private ownership of enterprises Clarke et al. (2004) focused on two fundamental questions:
First, which form of ownership promotes social welfare more effectively?
Second, why would politicians, who can maintain political support by subsidizing state-owned enterprises, ever relinquish control?
To the first question, most of the studies suggest that private firms often operate more efficiently than state-owned enterprises. Less empirical work has focused on the second question. However, a straightforward answer, based upon recent theoretical works, is that politicians choose to privatize when the political cost of maintaining
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state ownership outweighs the benefits. However, it is necessary to quantify the factors that enter the politician’s cost-benefit calculus and assess. But in some cases, economic crises, which worsen the fiscal situation of a government, might also alter the costs and benefits of privatization and make it more difficult for politicians of all types to subsidize loss-making state-owned enterprises (World Bank, 1995).
Clarke and Cull (1998) had an attempt to formally model, and test, which factors lead policy makers to relinquish control of state-owned enterprises. They found that political costs and benefits did have substantial impact on decisions to privatize. Especially in the banking industry, those provinces with larger fiscal deficits and lower quality banks, frequently in need of re-capitalization through government subsidies, were quicker to privatize.
Political parties also play a role. Those, whose interest tied less to the subsidized SOEs, are also quick to privatize.
They note however, the shareholders may also expropriate investment and impose fuzzy objectives on private managers and that governments may regulate private firms so as to appease interest groups. It is not therefore obvious that these are important factors in favor of private ownership.
Politicians have often been willing to forego efficiency to achieve their own goals. It seems unlikely that politicians would ever relinquish government control. However, it may be that not all politicians are alike. In addition, there are a number of factors that will affect the relative costs and benefits of privatization for all politicians (Donahue, 1989). State clean government laws and state laws restricting public spending encourage privatization at the country level in the United States. They suggest that this might be because these laws increase the cost of political patronage (Lopez-de- Silanes, 1997).
It is not immediately clear, however, that deficits should have a large effect on a politician’s decision to privatize. If the privatizer politicians can benefit from
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privatization during a crisis period, it is not clear why they wouldn’t benefit during a non-crisis period. One plausible explanation might be that distortional taxes make the cost of raising revenue higher during a crisis (when marginal rates have to be higher) than during a non-crisis period. In addition, crises might affect political players differently.
The political uses of privatization generally are bound to compromise the avowed efficiency objectives. Governments that are in a hurry to sell state-owned enterprises may make concessions to current managers, whose cooperation is instrumental in divestiture. Privatization then becomes an occasion for managerial enrichment and entrenchment. Moreover, governments commonly offer assets and enterprises up for sale to political allies. Some of these properties are not simply economic but political assets; the incumbent government gains obvious advantage by placing them in the hands of political allies. The same patterns have long been evident in the contracting of public services; indeed, contracting is the locus classicus of the political pay-off. Even public offerings are not immune from political use. When governments under price shares, they may be seeking to ensure not only that privatization is successfully realized, but also that happy shareholders have the opportunity to repay the government at the next election. Indeed, rather perversely, one could turn the whole force of public choice analysis on privatization itself where the logic of concentrated benefits and diffuse costs makes it altogether likely that the diffuse efficiency gains of privatization will be sacrificed in the effort to satisfy the big stakeholders-incumbent politicians and bureaucrats and their allies and supporters (Starr, 1998).
1.2.2.2. Economical Argument
The concept of economic growth is a fundamental part of the field of macroeconomics. Individual policies such as aid for investment, population control, and human capital investment have all failed as a solution to the lack of economic growth in developing and underdeveloped countries. Easterly (2001) alluded to an idea that a combination of different factors (investment, education, technological innovation), along with a fundamental structural change might be the path to long 85
term economic growth. One of the ideas that deeply noticed by Easterly is the people’s responding to incentives. He analyzed privatization as one of the incentives created by various economic models. This opinion has become the main subject for researchers to examine the relationship between growth and privatization from an incentives perspective. Privatization, a method of reallocating assets and functions from the public sector to the private sector, appears to be a factor that could play a serious role in the quest for growth. In recent history, privatization has been adopted by many different political systems and has spread to every region of the world. The process of privatization can be an effective way to bring about fundamental structural change by formalizing and establishing property rights, which directly create strong individual incentives. A free market economy largely depends on well-defined property rights in which people make individual decisions in their own interests. The importance of property rights is captured by economist De Soto (1996) as he stated, “Modern market economies generate growth because widespread, formal property rights permit massive, low-cost exchange, thus fostering specialization and greater productivity”. Therefore, along with creating strong incentives that induce productivity, privatization may improve efficiency, provide fiscal relief, encourage wider ownership, and increase the availability of credit for the private sector.
Privatization is widely promoted as a means of improving economic performance in developing countries. However, the policy remains controversial and the relative roles of ownership and other structural changes, such as competition and regulation, in promoting economic performance remain uncertain. Parker and Kirkpartrick (2005) suggested if privatization is to improve performance over the longer term, it needs to be complemented by policies that promote competition and effective state regulation, and that privatization works best in developing countries when it is integrated into a broader process of structural reform.
A world-wide era of privatization has been picking up momentum in recent decades, making it a fairly new trend in the area of economic policy. By referring to Poole (1996) another major contribution to the world-wide process of privatization has been
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the fall of the communist regime in Eastern Europe and the former Soviet Union. In recent times, countries like China, as well as many other developing countries have begun to implement privatization in the hope of stimulating economic growth so that the economic changes (mostly as the result of privatization) that the world has experienced since 1979 are even more profound than the political changes that ended communist rule in central and eastern Europe and the revolution in war fare displayed in the Balkans, central Asia and Middle East yet, privatization alone will not be the magical solution to the elusive quest for growth (Megginson, 2005).
In other way around Errunza and Mazumdar (2000) stated that successful privatization plan is indeed related to appropriate economic reform and effective macroeconomic stabilization policies. Any privatizer government may has variety of objectives in mind: to improve micro economic efficiency, to promote sustainable economic growth, to reduce the budgetary burden caused by inefficient state enterprises, to create revenues for the government, to help develop domestic capital markets and even sometimes to attract foreign direct investment (FDI).
Focusing on relation between privatization and economic growth, in developing countries it is hard to find precise assessment of the privatization impacts on macro economics mostly due to data constraints related to the time period elapsed since privatization, and to the difficulty to isolate the effect of privatization from that of other concomitant contemporary policy changes. Actually it is expected to see the implementation of privatization simultaneously with other structural reforms such as price deregulation, external trade liberalization, financial liberalization and financial sector reform. Otherwise, without accomplishing the mentioned reforms, the privatization will not be a wise step per se.
Boubakri et al. (2009) emphasized on major differences between political and economic backgrounds of transition countries from those of developing markets economies and summarized the findings of recent empirical studies as:
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Privatization positively affected GDP growth and that the effect was more significant for activities of a public goods type than for other sectors (Plane, 1997).
Privatization is positively correlated with real GDP growth rates (Barnett, 2000).
Initial per capital GDP growth and economic growth are positively related to private ownership and control (Palia and Phelps, 2003).
Although population growth, government consumption and, inflation in developing countries negatively influence economic growth yet, privatization plays an important role in stimulating economic growth (Boubakri et al., 2009).
In transition countries only voucher privatization has been significantly associated with faster economical growth. Moreover, neither private sector development per se nor capital market development exercised a significant influence (Bernett et al., 2007).
Privatization, in terms of volume and method of divestiture (public share issues as opposed to private sales to strategic investors), plays an important role in stimulating economic growth (Boubakri et al., 2009).
Economic performance is likely to be affected by factors that affect the wider economic environment in which privatized enterprises operate. In developing countries privatization is often accompanied by changes in economic policies that affect economic growth. Contrary to the results obtained by Pale (1997), Barnett (2000) and Boubakri (2009), the analysis by Cook and Uchida (2001) demonstrated that there is a robust partial correlation between privatization and economic growth in developing countries, suggesting that privatization has contributed negatively to economic growth. However, these findings do not refute the notion that the wider
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economic and socio-political environment may have important effects on economic growth and on the success of privatization.
Many like Easterly (2001) and Kira (2004) suggested that incentives play a significant role in the potential success of privatization as a factor of economic growth. In fact, privatization, accompanied by appropriate structural reforms, creates incentives to improve economic efficiency, increase investment, and adopt new technologies. Furthermore, the methods of implementing privatization play an important role in creating the right incentives and leading the way for the appropriate economic restructuring. It is essential to note that the success of privatization largely depends on the government commitment to legal and regulatory reforms. Boubakri and Cosett (1998) submitted that lack of appropriate governmental reforms might be the cause for a negative relationship between privatization and economic growth.
To end the discussion of mutual effects of privatization and economic growth, it is worth reminding that general presumption of most studies about privatization is that the privatization is not a panacea or cures all but, a part of problems’ remedy. Therefore, doubtlessly there is no abstract relation between privatization and economic growth and no precise conclusion about this relation under the ceteris paribus assumption, but there is always in interaction with so many factors as social, political, regional and so on.
1.2.3. Reformative Approach of Privatization 1.2.3.1. The Policy Debate on Privatization
The theoretical debate on privatization is often reduced to some simple arguments such as; privatization helps to raise revenues for the government. Gureiv and Megginson (2007) believed that private ownership strengthens the incentives for profit maximization and therefore should lead to increase productive and a locative efficiency. But indeed, any argue about privatization and its success considers the necessary reforms as a prerequisite of privatization. Any debate on privatization include a few of many different policy trade off for; time selection of privatization; 89
sale method; speed of the process; preference of efficiency or revenue; choosing the best buyer; or start from the smaller or from the larger SOEs. There are also many very important and somehow crucial debates on how the privatization impacts the different aspects of the capital market or what is the interaction between corporate governance and privatization or how far the legitimacy and transparency can immunize the whole procedure of privatization from corruptions and intervention of pressure groups? And in this part there will be a pondering about the views and the achievements of studies related to the mentioned subjects.
1.2.3.2. Privatization as a Part of Reform Program
More than hundreds of empirical analyses about privatization have been produced over the past 30 years that collectively examine many thousand companies divested by governments in over 125 countries. Megginson (2005) tied up all to demonstrate two general conclusions. First, it seems clear that moving a company from state to private ownership will usually improve that company's financial and operating performance, even if no other changes are made to the company or to the firm's operating environment. In other words, privatization works, even if adopted in isolation.
The second clear offered lesson is that the best results come about when ownership change is combined with deregulation, injecting competition, and other reforms to the firm and to its operating environment. In many cases, an SOE slated for privatization should be broken up into smaller operating companies before being divested, either to better engender competition or to make the newly private firm more responsive to market forces, or both. Changes of management are almost always required, and preferably should be made before privatization, since few of the political appointees who manage most SOEs will have the skills or mindset required to operate entrepreneurial company. Governments should also review the regulatory environment into which a SOE providing a basic service is being privatized, and in many cases the industry should be deregulated prior to (or simultaneously with) privatization of the incumbent operator. 90
To Megginson (2005), trimming of overstaff or unqualified employee is the most painful but necessary restructuring step that may also be required to position a newly privatized company for prosperity. Such a circumstance and its effect are the nightmares of any privatizer government. But in democratic societies, there is a trick to structure the incentives from severance payments and early retirement packages to ensure that the most valuable workers remain with the newly privatized company and the state's financial support goes to those laid-off workers who need help the most.
1.2.3.3. Corporate Governance
A nation’s corporate governance system can be defined as the set of laws, practices, and regulations that determine how limited-liability companies will be run- and in whose interest. Guriev and Megginson (2007) argued that corporate governance generally, and corporate legal systems specifically, significantly influence capital market size, ownership structure, and efficiency. Developing an effective, value- maximizing system of corporate governance is an increasing concern for most nations, doing so becomes a political and economic imperative for countries wishing to launch privatization schemes, particularly share issue privatization programs. When a government is determined to raise very large sums of money by selling blocks of shares in state-owned businesses to a citizenry, then it must create a new and trustworthy corporate governance system literally from scratch. This is not a difficult task anymore by the fact that many other countries have successfully executed privatization programs since 1979, and there is now a vast store of accumulated experience available to guide novice privatizers.
1.2.3.3.1. Interaction between Privatization and Corporate Governance
The findings of Jones et al. (1999) showed that governments deliberately structure privatizing share offerings to maximize political and economic benefits at the expense of revenue maximization. Taken as a whole, this pattern of behavior clearly suggests that governments should have cared very deeply whether their citizens have a positive investment experience after
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purchasing shares of SOEs being privatized. Governments therefore take great care in designing share offering, and must then be equally concerned that the stock markets, in which the citizens/shareholders trade their shares, are transparent markets. To ensure this, governments must take a number of steps more or less simultaneously- including adopting a new regime of corporate and securities law, establishing a regulatory body to oversee privatized utilities, and perhaps setting up an investor protection body. But governments are not the only actors who play critical roles in constructing post-privatization systems of corporate governance; in particular, no institution is more dramatically affected by large SIP programs than is the nation’s stock exchange. However it is important for any government to be concerned with corporate governance and take the steps along with the concerned private sector agents to develop an effective corporate governance system in their countries-whether or not a large- scale privatization program is being contemplated. To create the satisfactory corporate governance, Megginson (2005) listed four involvements as: Changing a nation’s corporate and securities laws Strengthening (or creating) the listing and disclosure requirements for its stock exchanges Enhancing the independence and competence of the national judiciary Establishing a regulatory regime capable of balancing the competing claims of managers, outside shareholders, and creditors. The economic pay-off success from this endeavor can be extremely large, but so can the penalties for failure. Any nation’s corporate governance system include a nation’s system of corporate and securities law to provide mechanisms for stakeholders to protect their rights and to resolve disputes, its court system to enforce commercial laws, adjudicating claims, and enforce private property rights in a timely and effective manner, the regulatory bodies established to enforce governance regulations, and the rules of the nation’s capital markets. There should also be 92
added of product market competition and the level of macroeconomic and political stability, as well as seemingly mundane topics such as the national commitment to transparent and inter nationally accepted accounting standards. Megginson (2005) gave a high importance to these two latest, since entrepreneurs are typically unwilling to make long-term, potentially expropriate investments in a country where legal rules are prone to sudden change or where taxes, inflation, or high interest rates can quickly eviscerate an investment’s value. Also, when managers must operate in an uncertain macroeconomic and legal environment, this balance usually shifts heavily in favor of self-dealing over value-maximization. It is logical to assume that the worst circumstance of effective corporate governance is when a country is suffering from political and economic instability, high inflation and endemic corruption all together and this is a time that unending stream of bribes flow through all the channels. Referring to the academic research and worldwide accumulated experiences, the investors will shun any capital market that does not require public companies to regularly disclose a great deal of detailed financial information, prepared according to the accounting standards observed in best-practice countries. While the general presumption appreciate the importance of economic stability and product market competition, the importance of mandating nationwide adoption of internationally accepted accounting standards should not be considered less. Ignoring the importance of international standards and acceptance related to the nation’s corporate governance will damage the privatization market by both domestic and foreign investors. It makes a great difference for domestic investors to commit their saving either in a close and opaque market or in an internationally standard one, in which they can easily have any legal transaction with global market. Foreign investors also will shun inter into such a capital market with no sufficient laws, regulative bodies and transparent information. That is why the relative importance of capital markets in the world’s economies has more than doubled over the past decade.
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1.2.3.3.2. Development of Effective Corporate Governance System
Guriev and Megginson (2007 and Megginson (2000) provided a prescription about priorities to be followed in establishing (or reforming) a workable governance system especially for developing countries as follows: Legal reforms: Instead of impossible change of entire system of corporate law, the governments have to provide better protective laws particularly, to support outside investors expropriation by insiders who have an incentive to enrich themselves through a variety of self-dealing schemes simply by mandating and enforcing sufficient information disclosure for outside stockholders and creditors to know they are in danger of being expropriated and effective venues like nation’s court system for investors to protect their rights. Mandate international accounting standards: Internationally accepted accounting standards joined with strengthening investor protection through reform of a nation’s corporate and securities laws can be assumed as a simple expectation of domestic companies. Megginson (2005) stated it as an accomplishment of three main purposes. First, it transfers much of the burden of reforming a country’s corporate governance system from the state to the private sector. Second, it prevents domestic companies from concealing financial and operating problems behind nontransparent accounting conventions, and ensures that all domestic companies can be compared both to each other and to the international competition. Third, helps attract international investors to nation’s stock and bond markets. These investors bring not only vast wealth, but also much needed professionalism and demands for managerial accountability. Promote high standards for listing on the national stock market: It is critical to face the absence of transparency at the stock exchange and where the stock exchange rules are set by government fiat. Member or investor-owned exchanges are more likely to mandate rigorous listing standards and to police the disclosure and governance policies of companies once they begin trading.
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Set clear rules for corporate control contests: It is vitally important to establish mechanisms that allow poorly performing corporate managers to be effectively changed by outsiders by setting rules for takeover contests. While the most extreme control contests may be socially unacceptable, most countries can take less dramatic but practically more important steps to promote managerial accountability like allowing the use of signed proxies, rather than requiring personal attendance at shareholder meetings, and mandating that companies hold shareholder meetings in accessible locations and at reasonable times. Encourage institutional investors to become major players in the national stock market: The past three decades have witness a nearly incredible increase in the liquidity and efficiency of capital markets in most countries. Not coincidentally, all the top listed countries have large funded (private) pension system and the largest number of active institutional investors, especially pension funds who bring a number of significant strengths to the market with them. They are sophisticated financial analysts, they command significant (often vast) resources, and they have the clout to demand that corporate managers perform effectively and attend to shareholder’s interests. Countries wishing to develop an effective corporate governance system should both encourage the growth of domestic institutional investors and attract participation by foreign institutions. Establish workable, efficient bankruptcy systems: Protecting investors also means protecting creditors, and this is usually impossible without providing creditors with a mechanism for penalizing borrowers who default and forcing the liquidation of hopeless or fraudulent debtors. This often is a very difficult step to take politically, where the government’s slogans are too favored debtors’ rights over those of creditors. Gine and Love (2008) added that a key aspect of an efficient bankruptcy system is its ability to encourage the reorganization of viable firms and the liquidation of unviable ones. This requires a delicate balance. On the one hand, if the law is lenient towards failing firms, it will inevitably allow inefficient firms to continue operations. 95
On the other, if the law favors liquidation, it will also liquidate viable firms. But more specifically for banking industry, Caprio and Honohan (2008) explained that the most damaging of systemic banking crises have ultimately involved or were significantly exacerbated by what is call bad banking and bad policies. They use ‘bad banking’ to embrace a range of management practice from fraud, to miscalculations of risk, to deliberate exploitation of the put option inherent in deposit insurance, that heightens the likelihood of bank failure. Also, significant regime changes in the economy often devalue both the financial and skills portfolio of banks, sharply increasing the risk of a banking crisis. However, the cross country empirical evidence suggests that policy is best directed towards ensuring a degree of market discipline on the behavior of bankers, as well as paying great attention to the incentives in the financial system. However, the case of Lehman Brothers is the most recent example to review the related systematic risk in the matter. As Fong and Fredriksson (2010) indicated, modern investment banks like “Lehman Brothers” are complex institutions with advanced and opaque structures, with daily transactions of several billion of dollars. Investment banking is extremely competitive and due to its nature there will always be a trade of between risk and potential profit. How prone one is towards risk is essentially a complex strategic decision, where risk contra profit must be carefully balanced to satisfy all the company’s stakeholders, both in short and long term. Before the bankruptcy, Lehman Brothers’ risk management department had identified five specific risks inherent in their business. 1- Market risk represents the potential unfavorable change in the value of a portfolio of financial instruments due to changes in market rates, prices and volatilities. 2- Credit risk represents the possibility that a counterparty or obligor will be unable or unwilling to honor its contractual obligations to Lehman Brothers.
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3- Liquidity risk is the risk that Lehman brothers are unable to meet their payment obligations, borrow funds in the market at a good price on a regular basis, to fund actual or proposed commitments or to liquidate assets. 4- Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. 5- Reputational risk concerns the risk of losing confidence from the customers, public and the government due to unfortunate decisions about client selection and the conduct of their business. There are also several strategic mistakes that eventually led the bank into bankruptcy. For instance, as the case of Lehman, They alter from a lower risk brokerage model to a higher risk, more capital intensive investment banking model. Instead of making money from transactions, they shift towards making money on long-term investments. Or sometimes for making big profit from subprime loans they originate loans and turn them into securities, which mean splitting many loans into tiny pieces and mixing them to even out the credit risk. Therefore, to develop effective corporate governance specifically in the matter of bankruptcy in banking industry, the fail of giant bank of Lehman Brothers reveals some important points to be considered. To Fong and Fredriksson (2010), firstly it’s likely that the bonus system encouraged the management to take big risks. Therefore, to decrease the future bonus-related risk taking could be to build in a risk-aversion parameter in the bonus criteria. For instance, no bonuses are rewarded if stress test shows large risks, even if profits are big, through stress testing by independent instances. Secondly, in avoiding lot of the market risk, the consequences of a hit in the chain of ties between assets can be less fatal if the banks be regulated to operate more diverse and not concentrated its portfolio. Thirdly, in the strategic shifting towards long-term investments, banks make themselves vulnerable to liquidity risks and become dependent on short-term funding for long-term investments, which turns out to be a fatal mistake as the credit market dries up and they will be stuck with illiquid assets. The shift also makes them much more exposed to 97
credit risk through subprime loans. This was where the Lehman Brother clearly underestimated the probability of massive defaults and the consequences they would have. To avoid this, they shouldn’t have lent as much and irresponsible and not owned the whole process from origination to securitization. Finally, the effect of the high leverage ratio can make the consequences of the other risks much deeper. A more flexible leverage ratio could be a way of decreasing the risks, although it can be difficult to achieve. The easy solution then is to use a low and sustainable leverage ratio from the beginning. Also, the government regulation which changed the maximum leverage ratio can be seen as a big error because it made sky-high leverage possible. Clarify- but limit- government’s role in corporate governance: An efficient corporate governance system does not arise in a vacuum. Many of the reforms detailed above, especially the legislative and regulatory reforms, cannot be accomplished without the national government playing a leading role. On the other hand, government’s role can easily become too dominant. In fact, a core problem with corporate governance in most countries is that state-owned firms play much too large a role in the nation’s economy or that the government’s claim on available private-sector credit is too high, or both. Perhaps the most straight-forward assertions is that, to the maximum extent possible, government should be a catalyst for change and should serve as an unbiased refer and regulator of private sector economic activity. The two great dangers for all political economies are first, a state that is so powerful that is strangles private initiative; and second, a state that is too weak to ensure political stability and enforce property rights. To achieve a creating domestic equivalents of America’s Silicon Valley or NASDAQ stock market as a dream of all countries, Megginson (2005) recommended that the corporate governance system must protect investors and reward entrepreneurs, and the national government must establish a legal and regulatory system that promotes competition, protects the property rights of
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legitimate corporate stakeholders, and encourages the growth of efficient capital markets. Guriev and Megginson (2007) provided the documents to show how the reform in case of developing effective corporate governance has dramatically contributed the total capitalization of the world’s stock market through privatizations by more market liquidity, more number of privatized firms and shareholders. Therefore, those countries, offer investors effective legal protection have large, liquid capital markets, while those countries that have neglected investor protection have smaller and less efficient stock and bond markets with less chance to enter the modern finance world.
1.2.4. Capital Market 1.2.4.1. Privatization versus Market Debate
No matter how heavy is the political weight of privatization for the governments but still they hope to develop their economy through privatization. Certainly, any positive or negative syndrome of such a development will first sparkle in the markets. From the markets means any change in capital or financial market, any change or transfer in the nature of the market (e.g.: transfer to market socialism), or any events such as market failure. The issue will be latterly discussed with more details.
1.2.4.2. Capital Market and National Legal Systems
While several authors had commented on the legal systems to effective corporate governance, La Porta, Lopez-de-Silanes, Shleifer, Vishney (1998) deepened on the case of investor protection to show that countries with poorer investor protection- measured both the character of legal rules and the quality of law enforcement- have smaller and less liquid capital markets. This is true for both debt and equity markets, suggesting that stock and bond markets are complements rather than supplements, and both require the proper legal infrastructure to reach maturity. La Porta et al. (1998) examined the investor protection characteristics of the world’s four legal systems (English common law, French civil law, German and Scandinavian law), and
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found that common law countries offer by far the greatest protection to non controlling investors. Their study across 49 countries resulted that civil laws give investors weaker legal rights than common laws do, independent of the level of per capita income. Common law countries give the shareholders and creditors the strongest and French civil law countries the weakest protection. German civil law and Scandinavian countries generally fall between the other two but with this differences that, the Scandinavian family is usually viewed as part of the civil law tradition, although its law is less derivative of Roman law than the French and German families and it has spread around the world less than German civil law. The quality of law enforcement is the highest in Scandinavian and German civil law countries, next highest in common law countries, and again the lowest in French civil law countries. Further, La Porta et al. (1998) documented the fact that ownership concentration is highest in countries offering poor investor protection, which is consistent with the idea that small, diversified shareholders are unlikely to be important in countries that fail to protect outside investors.
These groups of studies support this proposition that a nation’s legal system influences the optimal ownership structures of publicly listed companies, and that ownership structure “matters.” Then in 2002 La Porta, Lopez-de-Silanes, Shliefer and Vishney, documented that countries with the greatest legal protection for investors also assign the highest valuation to publicly traded shares. The clear implication of this finding is that individual investors are more willing to entrust their savings to capital market investments when they are confident that their wealth will not be expropriated by insiders. Demirguc-Kunt and Maksimovic (1998) showed that in countries whose legal systems score high on an efficiency index, a greater firms’ proportion use long-term external financing. They also documented that an active stock market and large banking sector are associated with externally financed firm growth, and that companies in countries with weak financial sectors are unable to fund maximum achievable growth. Finally, though Coffee (1999) took issue with focus on the transcending importance of a nation’s system of corporate law, emphasizes differences in national securities laws and regulations and agrees that the
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commercial legal system is a vitally important part of an effective corporate governance system.
1.2.4.3. Financial Market
Stock market is one of the first places to see any alarm as an impact of privatization and its development is one of the important impacts of privatization. The relationship between privatization and stock market development seems to be well understood by the governments: Megginson, Nash, Netter, Poulsen (2004) show that governments are more likely to privatize through share issues in the countries with less developed capital markets, apparently in order to foster stock market development.
Guriev and Megginson (2007) considered the privatization not only as a contributor to the rise of the global capital markets but, more importantly, as a cause of increase in capitalization and liquidity of almost all non-U.S. national stock markets.
Successful promotion of national stock market development can yield significant political and economic benefits. The political benefits include the creation of a class of citizen shareholders, plus the reflected glory resulting from the growth capital market. Focusing on direct link between capital market development and economic growth, recent economic researches show that large, efficient capital market promotions cause rapid economic growth. Sale method also is always under the observation of the researchers as an important component in cause- and –effect relationship between privatization and stock market development.
While it is very different to establish a direct counter relation between SIP programs and stock market development, indirect evidence suggests that the impact has been very significant. For instance at the end of 1983, the total market capitalization of the handful of British, Chilean, and Singaporean firms that had been privatized was far less than $50 billion and by the end of May 2000, the 152 privatized companies had a total market capitalization of $3.31 trillion (see table 7.6 of Megginson, 2005).
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Megginson (2005) observed the different methods of sale in the case of developing the financial market and concluded that Asset sale offers many benefits, including speed and ease of sale, and the ability to sell a large fraction of a company in one transaction. A private sale should thus be considered the method of choice for selling small companies. He also indicated that public share offering considered the default choice for selling medium and large companies. Although it is costlier and more difficult to arrange than asset sales but have three decisive advantages. First, SIPs raise more money for a given fraction on the company sold than do asset sales. Second, SIPs are inherently transparent financial operations. Third, and most important, privatization through public share issuance offers the single best-and perhaps the only-opportunity for governments to massively promote the development of their national capital markets.
Megginson (2005) referred to a consensus among economists that well-developed financial markets promote economic growth. Unfortunately, it is also painfully obvious that efficient capital markets do not arias spontaneously, but must be nurtured through deliberate public policy actions. This includes adopting legal and institutional reforms to protect private property rights, as well as establishing an effective regulatory regime with a capable supervisory body. Though these reforms are vital, they are rarely sufficient to promote financial market development because markets also require a supply of financial assets to trade.
1.2.4.4. Market Failures
Market failures, even when they exist, do not have to be corrected through public ownership. Much can be achieved through regulation, taxation, and private provision of public goods. Holmstrom and Milgrom (1991) and Shleifer (1998) argued that privatization may result in an excessive emphasis on profit maximization at the expense of other socially valuable objectives. If the latter are not contractible, then the multitasking theory suggests that it may be optimal to weaken the profit maximization incentives. For example, private prisons may be very good at cutting costs but do not necessarily internalize the well-being of the convicts (Hart et al. 102
1997). Therefore state ownership of prisons may be socially optimal disregarding its cost and apart from profit gain from its privatization. This argument applies to all societal effects of privatization–externalities, distributional concerns and market power–whenever government’s regulatory capacity is limited. If, for some reason government cannot ensure effective regulation of the privatized firms to limit the negative externalities, privatization may indeed have negative implications for social welfare.
The regulatory failure may arise from either lack of competence or incentives within government bureaucracy or because of regulatory capture by the regulated firms. As shown in Guriev and Rachinsky (2005) privatization can create powerful interest groups that have a serious effect on economic policy choices. In particular, if privatization creates large private monopolies in an economy with poor institutions, it is very likely that competition policy will never develop. On the other hand, public ownership may not resolve all the relevant issues. Both in democratic and in non- democratic regimes politicians are often concerned with issues other than economic efficiency and social welfare; they may be either driven by political motives or simply corrupt. Privatization reduces their ability to pursue political objectives.
1.2.5. Level Effects of Privatization
It is not hard to name numerous levels of effects for privatization. Its pervasive extent is from power to poverty, person to society, firm to country and politics to economy. Generally, any change arising from privatization is a picture of one of its level effect. Therefore, to limit such a vast area of discussion, only some of those issues that are not being noticed, before or later, will be discussed as the following sequence:
1.2.5.1. Income and Wealth Distributional Level Effects
Starr (1998) maintained that Community empowerment is generally one of the effects of privatization. He pointed to the different set of arguments, not chiefly concerned
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with efficiency, but comes from a more sociological theory of privatization that emphasizes the strengthening of communities.
Megginson (2005) stated that we cannot measure the overall fiscal and distributional impact of privatization on different groups of citizens until we know what governments do with these financial windfalls. If the proceed are saved-used to reduce outstanding debt or to minimize additional debt issuance in the future, then the net financial position of the government is improved. On the other hand, if the proceeds are spent on social programs or redistributed among citizens through fiscal transfers, then the favored groups will naturally benefit more than others. However, if the sale proceeds are spent wastefully (e.g.; to defend an overvalued currency in order to fuel additional domestic consumption), a society’s overall economic health will be harmed.
There is also far less study about the impact of privatization on income distribution with a country. In general, most privatizations result in some employment shedding, but that the workers who remain at privatized companies are usually paid significantly more. There is no clear indication or considerable information to find out what happens to the workers who are made redundant after privatization. But it is particularly important to know whether, and under what terms, workers who are laid off by privatized companies are rehired by other private-sector firms. If displaced workers are able to quickly find work at comparable wages elsewhere, then the income distribution impact of privatization will not be severe. But if laid-off workers cannot find alternative employment quickly, or if the alternative jobs pay significantly less, then national incomes will be severely impacted by privatization. The effects of privatization on social welfare and inequality have often been traditionally focused on utilities divestments by measuring the effect of privatization on the access to services and generally find substantial benefits especially for lower income groups (MacKenzie and Mookherjee, 2003 and Appiah-Kubi, 2001).
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1.2.5.2. Organization Level Effects
Needless to say that any change in the firm’s ownership will be the reason of many other starting from changes in goals and mission to the managerial structure and continues to the other organization levels. Forro, Newcomer, El Baradei (2004) are among those who implicitly studied the impact of privatization on different aspects of the organization structure indicating that shifting ownership from the public to the private sector will lead to changes within the organization. Merging their findings on this particular issue could provide two categories of structural and cultural changes that are briefly shown as follows:
Structural Changes:
Changes in the Board of Directors; replacement of private owners selected managers with government appointed once.
Changes in Management; reporting to public officials and accountability for political objectives by the state`s managers changes to reporting to the shareholders and accountability for financial objectives.
Changes in Mission, Goals and Values; change of social goals and objectives to personal benefits, protection of employee to welfare of stake holders, and serving the current costumers to plan for new costumers.
Changes in Capital Investment; replacement of rely on government’s finance with liberating (approach both domestic and foreign capital market) and constraining (discipline new capital spending by the market and the creditworthiness of the privatized company.
Changes in Investment in Employees; more willing to invest in training instead of under-invest.
Cultural Changes: 105
Changes in Decision Making; replacement of centralized decision making with tendency to involve multiple (politically set) goals and values by decentralized decision making with primary focus on return-on-investment.
Change in Human Resource Management; replacement of political protective factors for the workers with no protection but productivity based compensation. And instead of giving credit to seniority or political contacts, the employee skills, work effort, and contributions to profits are rewarded.
Changes in Employee Perceptions; greater employee involvement in decision making and in their sense of ownership in the organization through the sale of at least some portion of the company to the employees and more incentive driven compensation.
1.2.5.3. Firm Level Effects
Remarkable number of studies including common objectives along with most common results provide this occasion to tie up and summarize their conclusions dealing the subject of firm level effects of privatization and the followings are the brief extractions of Megginson (2005), Chong and Lopez-de-Silanes (2005), Guriev and Megginson (2007) and tables 2.1-2.4 of Megginson (2005).
Megginson, Nash, Van Randenborgh (1994), Boubakri and Cosset (1998) and De Souza and Megginson (1999) documented economically and statistically significant post-privatization increases in output (real sales), operating efficiency, profitability, capital investment spending, and dividend payments, as well as significant decrease in leverage and improvement in firm performance after privatization.
Boubakri, Cosset, Guedhami (2003) pointed out that private ownership tends to concentrate over time after divestment, and that privatization indeed results in a relinquishment of control by the privatizing government over three years after initial sale. Much of the decrease in state ownership is absorbed by foreign and local
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institutional investors, while the average stake held by individuals is less important. Also find that interaction between legal protection and ownership concentration has a significant negative effect on firm performance, suggesting that ownership concentration matters more in countries with weak legal protection.
Verbrugge, Megginson, Ownes (1999) pointed out that moderate performance improvements in OECD countries. Ratios proxy for profitability, fee income (non- interest income as fraction of total), and capital adequacy increase significantly; leverage ratio declines significantly.
Boardman, Laurin, Vining (2000) alluded that profitability, measured as return on sales or assets, more than doubles after privatization, while efficiency and sales also increase significantly (though less drastically). Leverage and employment decline significantly, while capital spending increases significantly.
Omran (2004) stated that profitability, operating efficiency, capital spending, dividends and liquidity increase significantly after privatization, while leverage, employment and financial risk (measured as the inverse of times interest earned) decline significantly. Performance changes pervasive across subgroups, but some evidence that full privatization works better than partial.
Okten and Arin (2003) documented that productivity; capacity utilization; output and investment significantly increase after privatization while, employment; per unit costs and prices decline significantly. They also showed that output, labor productivity, capital and capital to labor ratio increase significantly while, employment, per unit costs and prices also fall. Privatization clearly induces technology shift.
Omran (2002) differently pointed out that SOEs' performance also improves significantly during post-privatization period, and that privatized firms did not perform any better than SOEs.
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Sun and Tong (2003) concluded that privatized companies increase their absolute level of profits and increase dividends and reduce leverage. They showed that institutional investors and directors have positive impact on privatized firm performance, and that option schemes, rather than direct remuneration, give better incentives to managers.
De Souza and Megginson (2000) observed that profitability, output, operating efficiency, capital spending, number of access lines, and average salary per employee all increase significantly after privatization. Leverage declines significantly; employment declines insignificantly.
Vining and Boardman (1992) examined that after controlling for size, market share and other factors, private firms are significantly more profitable and efficient than are SOEs. Thus, ownership has an effect separable from competition alone.
Boardman and Vining (1989) and Tian (2000) noted that state-owned and mixed ownership firms are significantly less profitable and productive than privately-owned companies. Also find mixed ownership firms are no more profitable than pure state- owned companies-so full private ownership required to gain efficiency.
Megginsom (2005) regarding the aforementioned results emphasized that tens of studies on developed, developing and transition countries using very diverse methodologies seem to yield very similar results about the firm level effects of privatization.
1.2.5.4. Investment Level Effects
The general presumption deals with the idea that there is a clear desire from the side of private sector to more investment in the privatized firms. But there are not less who protect this argument that government by desire or compulsorily has to invest in SOEs as much as and whenever is needed. They do it because the SOEs as their
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political tools should be in the operation, employees and their related should be enough happy to sell their votes and no SOE is permitted to go bankruptcy.
Boubakri and Cossete (1998) specifically pointed to the subject of “more investment” in privatized SOEs of developing countries. Megginson (2005) observed that general conclusion of studies that SOEs have rarely over-invested relative to their private sector counterparts. In fact, the low levels of profitability or, in many instances, the large operating losses incurred by SOEs precluded them from funding capital investments with internally generated cash flows.
Actually, these are all pointed to the era of pre-privatization and normally the discussion should leaded to pro-privatization section to see what may be the effects of privatization on investment level specifically by private sector. Other than being freed from government funding needs, there are many reasons why privatized firms might increase capital spending. First, post restructuring tends to reverse excessively employee rich and capital poor of privatized SOEs. By restructuring production, privatized firms can reallocate resources to higher valued uses. This in turn can stimulate additional investment. Second, because of being more profitable, the newly privatized firms generally have better access to private debt and equity markets and hence are better able to finance their investment needs. Third, privatization is usually accompanied by deregulation and market opening that exposes these firms to new competitive pressures and consequently they can have very large investment needs. Furthermore, many SOEs fall behind on routine maintenance because of the lack of budgetary resources. Newly privatized firms can face substantial investment needs as a result of years of deferred routine maintenance or even renewing.
Empirical studies on the determinants of investment have generally associated increased levels of investment with a macroeconomic environment characterized by high growth and stable prices. Low external indebtedness and fiscal deficits have also been positively correlated with high levels of investment. In order to gain some insight into the impact of privatization on private investment, Megginson (2005) referred to an empirical model that was used to estimate the importance of 109
privatization as a determinant of investment in developing countries. The results, are consistent with the view that privatization of SOEs is likely to have a fixed investment multiplier effect and is, therefore, a very important ingredient of governments’ efforts to improve the business climate and to step up the pace of development.
1.2.6. Privatization Experiences around the World
Following the propounded essential aspects of privatization, here on, there will be a worldwide review of privatization and in categorizing the review to developed, developing, under developed and transferred countries however, under developing countries will not be included in this discussion because as Shahabbudin (1993) mentioned, so many activities in under developed countries are being performed by the public sector that the performance of the private sector is inherently dependent on the performance of the public sector.
Since 1979, many countries have embarked on the course of privatization which has changed the economic landscape around the world. Privatization has spread within many industries, including those that had never been privately owned. Privatization has transformed command economies in post-communist countries into decentralized ones. It has changed the political balance of power in many societies and revolutionized global financial markets. Yet, the intellectual debate on the benefits of privatization is far from over. The available researches show that the impact of privatization on the privatized firms and on the economy and society depends on many variables including political and economic institutions. There are significant complementarities between privatization and other reforms. It also matters how privatization is structured and who the new owners are and particularly, are there substantial benefits to opening up to foreign ownership?
While it is now hard to imagine the world without privatization, even if it is still a very recent phenomenon by historical standards. While there were important privatization programs in West Germany in the early 1960s, and in Chile during the 1970s, state ownership of business enterprise was pervasive, and growing, in the world economy until a quarter-century ago.
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Guriev and Megginson (2007) believed that privatization in developed countries was a result of the Great Depression, which inspired a profound critique of private ownership and also the two World Wars, during which governments established (or reestablished) public ownership over “strategic” industries. It was also considered that privatization in developed countries are influenced by widespread acceptance of social democrat philosophies stressing the strategic need for state control of an economy’s “commanding heights.”
In the socialist countries, public ownership as the means of production was the essential piece of ideology then the private ownership was limited to personal consumption goods and in some countries, to small agricultural land plots. Not surprisingly, given the perceived success of Soviet industrialization and the important role of public ownership in the developed West, many developing countries also adopted state-directed development policies during the post- World War II era.
By the late 1970s, however, there was growing disappointment with the dismal performance of the state-owned companies, as well as the growth slowdown in the socialist countries, prompted the first privatization attempts by Britain’s conservative Thatcher government. Guriev and Megginson (2005) briefly explained that until the Thatcher government came to power in 1979, the answer to this debate in the U.K and elsewhere was that the government should at least own the telecommunications and postal services, electric and gas utilities, and most forms of non-road transportation (especially airlines and railroads). Many politicians also believed the state should control certain “strategic” manufacturing industries, such as steel and defense production. In many countries, state-owned banks were also given either monopoly or protected positions, as discussed in La Porta, Lopez-de-Silanes and Shleifer (2002).
Since then, this privatization movement has not stopped with the beginning of the new century. Between 2000 and 2005 more than 970 privatization transactions have taken place worldwide (Garcia and Anson, 2008) and privatization has spread to more than 130 countries that collectively have privatized tens of thousands of firms. Privatization has produced substantial fiscal benefits in many countries, privatization revenues accounted for considerable amount of government budgets and saved almost as much via eliminating the need for further subsidies to the state owned enterprises. 111
Guriev and Megginson (2007) concluded that privatization is one of the major economic phenomena in recent economic history. The extant evidence from privatizations in many developed and developing shows that privatization usually results in an increased productivity and positive effects on the society. The effect of privatization depends however on economic institutions in place, in particular on rule-of-law, competition, hard budget constraints, quality of governance and regulation.
1.2.6.1. Privatization in Developed Countries
The Depression, World War II, and the final breakup of colonial empires pushed governments into a more active role, including ownership of production and provision of all types of goods and services, in much of the world. In Western Europe, governments debated how deeply involved the national government should be in regulating the national economy and which industrial sectors should be reserved exclusively for state ownership.
Thus, there had been a tremendous growth in the use of SOEs throughout much of the world, especially after World War II, which in turn led to privatizations several decades later.
Although the Thatcher government may not have been the first to launch a large privatization program in developed countries, it is without question the most important historically. Among the developed countries United Kingdom has pioneered the largest privatization program to date, subsequently becoming a leading advisor and exporter of these ideas to other countries so that organizations such as the World Bank and the IMF, in their studies of, and recommendations to developing countries have chosen the UK as the exemplar model.
The Thatcher government instigated a program of privatization that its scheme fell into three phases. It began with the privatization of industries in competitive markets then next with utility companies and finally those companies, which either needed considerable re-organization or which provided a socially desirable service.
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According to Moore (1986) managing the successful transfer of business from the public to the private sector may take two to three years and can be divided into three basic parts. First part is to identify the suitable candidates; secondly, the viability of the companies to survive and flourish in the private sector, and where necessary injecting new talents and systems, reorienting and reorganizing the business; thirdly, the marketability of the company at a price, which fairly reflects the exchequer’s interest. These three parts were utilized in its most advanced structure in UK. In 1979, when the government decided to privatize the state-owned enterprises, it first identified the ‘right’ candidates. Then it hired management consultants and merchant banks to undertake a comprehensive feasibility study and privatization action plan for implementation. Next step was the selection of consultants and advisors in the areas of share and assets evaluation and underwriting, stock brokering and financial aspects. After finalizing the structural adjustment, a regulatory framework was developed in respect of a price package and customer care. An introductory framework for monopolistic companies was drawn up to enable them to be transferred from public to private. At the final stage of the process, advisors for sale were selected (i.e., brokers, solicitors, merchant banks and advertisers). To co- ordinate the procedure, a unit in the Treasury undertakes this work. Each industry and privatization program was attached to a State Minister or Secretary of State. The Treasury assumed responsibility for the timing of the sale including the assessment of the enterprises for sale as well as guiding the relevant departments in ‘corporate image advertising’ to increase the sale of shares.
If the privatization in UK is known as a pioneer model, France also may be considered as a provider of model based on nationalization as a pre-step for privatization.
The Chirac government commenced the privatization program cautiously in October of 1986. The first action was to sell some shares mostly to test of the capital market's appetite for privatizations. The response was favorable. Then to selloff the firms nationalized under the nationalization program of the socialists. In these firms an
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extensive investment program had been carried out to update the enterprise's equipment and production facilities. This investment program had increased the indebtedness of the company but the privatization offering was oversubscribed. The privatizations were carried out successfully but there was not the same degree of oversubscription that characterized the immediately preceding privatization, raising the fear that the magnitudes of the privatizations were impinging upon the capacity of the capital markets to absorb additional privatizations. At the next step, October 1987, the worldwide stock prices collapsed and made investors aware of the risks of stock investment. Prior to that period the shares of previous privatizations were trading at a premium over the price at which the shares were sold to the public. After October of 1987 potential buyers were acutely aware that they could actually lose money on privatized businesses. Although the Chirac privatization program more or less ground to a halt in early 1988 there was a considerable amount that was achieved. By February of 1988, 29 of the 65 enterprises planned for privatization had been privatized with the workforce of about one half million and the sale revenue of 120 billion francs. The program had promoted popular capitalism with five million more stock owners, including the workers who purchased stock in the companies they worked for. As Watkins (2003) noted, the cessation of privatization may have come as much for political considerations as concern for capital market condition.
Privatization in Ex-East Germany after unity of Germany is another outstanding privatization model in developed countries. Dyck (1997) developed and tested an adverse selection model to explain the Treuhand's role in restructuring and privatizing eastern Germany's state-owned firms. In less than five years, the Treuhand privatized more than 13,800 firms and parts of firms and, uniquely had the resources to pay for restructuring itself, but almost never chose to do so. Instead, he emphasized speed and sales to existing western firms over giveaways and sales to capital funds. Dyck (1997) rationalized Treuhand's approach by showing that privatized East German firms are much more likely to transfer western (usually German) managers into key positions than are companies that remain state-owned. Treuhand emphasized sales open to all buyers rather than favoring eastern Germans. Principal message behind the
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Treuhand’s privatization plan was “privatization programs must carefully consider when and how to affect managerial replacement in privatized companies”.
Among the several studies on the subject of privatization in developed countries Martin and Parker (1995), Boles de Boer and Evans (1996), and Newberry and Pollitt (1997) all concluded that the privatization had a significant positive impacts on financial and operation performance of privatized companies with focus on the issues of their profitability and productivity. The identified evidences were also the supportive indications that not only privatization per se, but also the relinquishment of control by the State or the presence of foreign investors in the firms` capital is important determinants of the privatized firms’ performance. Furthermore, liberalization and competition policies contributed substantially to improve firms’ performance. Liberalization has a positive impact on firms’ efficiency, which suggests that macro-economic reforms create the necessary incentives for privatized firms to improve their performance.
Villalonga (2000) examined the effect of privatization on efficiency for 24 Spanish firms and found that capital intensity, foreign ownership and size are to efficiency improvements.
Laurin and Dumontier (2003) investigated the result of re-privatization after nationalization in developed countries and found that government created value in nationalized firms, but state and taxpayers did not benefit because of premium paid to shareholders upon nationalization. Financial and operating performance of companies improved during nationalization and after privatization, while efficiency improved over all three periods. Employment, leverage and dividends decline during nationalized period, but increase after privatization.
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1.2.6.2. Privatization in Transition Countries
At the beginning of the 90s the eastern European and four Soviet Union countries started a massive process of political and economic reform hoping to achieve living standards as developed countries.
Godoy and Stieglitz (2006) mentioned two strategies that were offered. One argued that the process of liberalization and privatization should be done as quickly as possible to faster e a market economy and be able to avail them self faster of the growth opportunities that the market provides. Other proposed a more gradual process of reform as to sell government assets slowly liberalize the economy more gradually. This school argued that there are large costs associated with very rapid adjustment, and that there were large risks associated with, for instance, privatization before certain institutional changes have been put into place.
With the rapid political changes that took place in Central and Eastern Europe, the new governments that came to the power faced daunting challenges in transforming their economies quickly in order to establish political stability and create a foundation for their emerging market systems. Prokopenko (1995) stated that most economic reformers in Central Europe understood that developing the private sector and privatizing state enterprises were essential elements in introducing a market economy. In these countries privatization was seen as an instrument for reducing inflation by promoting private investment in SOEs and for reducing external debt by attracting foreign capital investment in privatized firms.
The last major region to adopt privatization programs comprised the former Soviet- bloc countries and Central and Eastern Europe. These countries began privatizing SOEs as part of a broader effort to transform themselves from command into market economies. Therefore, they faced the most difficult challenges and had the most restricted set of policy choices. After the collapse of communism in 1989-91, all of the newly elected governments of the region were under pressure to create something resembling a market economy as quickly as possible. However, political 116
considerations essentially required these governments to significantly limit foreign purchases of divested assets.
Since the region had little financial savings, these twin imperatives compelled many - though not all - governments throughout the region to launch “mass privatization” programs or distributing vouchers to the population, which citizens could then use to bid for shares in companies being privatized. These programs resulted in a massive reduction of state ownership and were initially popular politically, then they became unpopular in many countries (especially Russia) because of the largely correct perception they were robbery by the old elite and the new oligarchs. The net effects have been disappointing in some cases but have varied widely.
Testing for the effects of privatization on firm performance is even more difficult in transition economies than in non-transition economies. Verbrugge et al. (1999) studied the privatization in countries with transition economies with special attention to Central and Eastern Europe, China and Former Soviet Union. They found that in general, the data from transition economies is much worse and much more limited than from non-transition economies. Finally, the transition privatizations occur at the same time as other major changes in the political and economic environment. The number of firms privatized in some way in transition is much greater than in non- transition economies.
Privatization is both more difficult and more all-encompassing in countries with transition economies than it is in either industrialized or non-transition developing countries. This is because in transition economies privatization is only part of the massive changes in the economy as countries move from communism to a more market orientated methods of allocating resources and organizing production.
As isolating the effects of privatization itself problematic further, miss reporting and accounting difficulties were also rife in transition economies (Djankov and Murrell, 2000).
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Transition countries employed varying methods of privatizing SOEs, including asset sales (Hungary and eastern Germany), voucher privatizations (the Czech Republic and early Polish divestitures), spontaneous privatizations (Slovenia), share offerings (later Polish sales), or a combination of techniques.
Pohl, Anderson, Claessens, Djankov (1997) indicated that privatization dramatically increases restructuring likelihood and success. Firm privatized for 4 years will increase productivity 3-5 times more than a similar SOE. Little difference in performance based on method of privatization, but ownership and financing effects impact restructuring.
Frydman, Gray, Hessel, Rapacznski (1999) and Frydman, Hessel, Rapaczynski (2000) stated that privatization "works", but only when firm is controlled by outside owners (other than managers or employees). The more entrepreneurial behavior of outsider-owned firms is due to incentive effects, rather than human capital effects of privatization-specifically greater readiness to take risks. Zinnes, Eilat, Sachs (2001) added while ownership matters, institutions matter just as much. More specific than outside owners are foreign owners that have played an important role in the transition countries privatization. Smith, Cin, Vodopivec (1997) found out that concentrated foreign ownership improves economic performance and indicated that firms with higher revenues, profits, and exports are more likely to exhibit foreign ownership.
Angelucci, et al. (2001) and Claessens and Djankov (2002) examined changes in the performance of 6,354 privatized and state-owned firms in seven transition economies documented that privatization is associated with significantly increased sales and productivity growth and, to a lesser extent, with fewer job losses.
Focusing on the concentrated ownership, Classens, Djankov and Pohl (1997), Weiss and Nikitin (1998), Classens and Djankov (1999b), Grosfeld and Tressel (2002) examined the relationship between ownership concentration and corporate performance for privatized firms in transition countries and indicated that concentrated ownership is associated with higher profitability and labor productivity. 118
Burg et al. (1999) examined relative roles of macroeconomic variables, structural policies, and initial conditions in explaining the large observed differences in output performance after transition began. The results pointed to the preeminence of structural reforms over both initial conditions and macroeconomic variables in explaining cross-country differences in performance and the timing of recovery from the sharp recession that hit every transition economy in the early 1990s.
Claessens and Djankov (1999a) studied the effect of management turnover on changes in financial and operating performance of privatized firms and stated that the appointment of new managers is associated with significant improvements in profit margins and labor productivity, particularly if the managers are selected by private owners. New managers appointed by the National Property Fund also improve performance, though not by as much.
Lizal and Svejner (2001) tried to access the effects of mass privatization on firm performance and indicated no improve of long-term performance.
Among the transition countries Russia provides an example of what can go wrong with privatizations. Black et al. (2000) named three reasons for this fail. First, rapid mass privatization by selling control of its largest enterprises cheaply to crooks, which transferred their skimming talents to the enterprises they acquired, and used their wealth to further corrupt the government and block reforms that might constrain their actions. Second, profit incentives to restructure privatized businesses and create new ones that were swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, since self-dealing accompanied privatization, it politically discredited privatization as a reform strategy and undercut longer-term reforms. This did happened in the absent of developing the institutions to control self- dealing in privatization of large firms. In the 1995 “loans for shares” scheme, that transferred control of twelve natural resource firms to a small group of “oligarchs” at very low prices. Black et al. (2000) argued that this was a corrupt and non-transparent transfer of assets that precipitated widespread insider expropriation. Further, it 119
contributed to the political unpopularity of privatization in Russia mostly because of non-transparent procedure.
All the above mentioned studies in transition countries consider many common results that Guriev and Megginson (2007) summarized them as follows:
Private ownership is associated with better firm-level performance than state ownership.
Concentrated private ownership results greater performance improvement than diffuse ownership.
Foreign ownership, associated with greater post-privatization performance improvement than is purely domestic ownership.
Firm-level restructuring causes significant post-privatization performance improvements.
Performance improves more when new managers with more entrepreneurial behavior are brought in to run a firm after it is privatized than when the original managers are retained.
The impact of privatization on employment is ambiguous, primarily because employment falls for virtually all firms in transition economies after reforms are initiated.
There is little evidence that governments have been able to impose hard budget constraints on firms that remain state-owned after reforms begin.
1.2.6.3. Privatization in Developing Countries
Privatization is widely promoted as a means of improving economic performance in developing countries. However, the policy remains controversial and the relative
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roles of ownership and other structural changes, such as competition and regulation in promoting economic performance remain uncertain. If privatization is to improve performance over the longer term, it needs to be complemented by policies that promote competition and effective state regulation, and that privatization works best in developing countries when it is integrated into a broader process of structural reform (Parker and Kirkpatrick, 2005).
The privatization efforts of most developing countries are inhibited by embryonic financial markets, weak regulatory capacity, and a public sector that accounts for a large share of GDP. Many countries, particularly those with low per capita income, lack some of the main ingredients for a successful privatization, such as capital, entrepreneurs, and competent managers. But some of these countries have large markets and fast economic growth rates, features that make the success of government divestiture more likely. Developing countries in the 1980s were confronted with fiscal crises that put considerable constraints on the capacity of the states to invest in SOEs. This had negative repercussions at the macroeconomic level that in turn adversely affected firms in both the public and private sectors. Often, reforms were part and parcel of structural adjustment programs that emphasized speedy privatization, not necessarily privatization that would promote efficiency and equity. Given these sets of circumstances, considerations of efficiency have been less important for many governments than the need to overcome resource constraints. For those countries where public enterprises represented a substantial drag on the fiscal balance, the outcome of privatization can be deemed positive if it shifted the weight of financing investment from the public to the private sector. However, privatizations have been occurring at an increasing rate over the past decade, particularly in developing countries and especially for gaining revenues (Boubakri and Cosset, 1998).
Privatization can be beneficial for firms operating in a competitive market structure in middle-income countries partly with modest reductions in labor. Projecting the long- term outcomes of privatization based on the actual outcomes for the first few years
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after privatization assumes that the short term gains will be sustained. Restructuring prior to privatization can greatly reduce the benefit of privatization cash flow and give a distorted view of the impact of divestiture on labor. The larger changes faced by developing countries from the late 1980s onwards make it particularly difficult to look at pre- and post privatization performance under the ceteris paribus assumption. The private sector has become more productive as a consequence of trade policy reform, domestic price liberalization and privatization. Capital market development has resulted to a large extent from financial liberalization and broader economic deregulation. More generally, the fact that many countries were undergoing structural adjustment programs meant that the broader economic framework in which privatization took place was changing and this was an important contributing factor to successful privatization (Boubakri and Cosset, 1998).
The comparison of revenues from privatization in the worldwide scale (Fig. 2) and in developing countries (Fig. 3), more or less shows a very similar upward trend during 1988-1997 that continued with high amount till 2000. The sharp elimination of Latin American countries’ share had a serious effect on privatization trend of developing countries. But eventually for analyzing the whole issue there should investigate additional reasons of slowing down the privatization in MENA, SF and SSF areas for the same temporary period.
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Fig. 3: Developing Countries Revenues from Privatization 1988-2003
Source: Fig. 1of Guriev and Megginson, 2005
The study of Megginson, Nash, Randenborg (1994) covered a larger sample, comparing the pre- and post privatization financial and operating performance of firms in eighteen countries and they presented strong evidence that after privatization the sample firms became more profitable, increased their real sales and investment spending, and improved their operating efficiency. The companies also significantly reduced their debt levels and increased dividend payments. Perhaps more surprising, they increased employment.
As Dinavo (1995) stated, many governments of developing nations have embarked on privatization as a mean to enhance their economies. Many of these governments in Asia, Africa and Latin America are slowly but cautiously turning SOEs over to the private sector. This is because of the benefits that come with a free market economy and free enterprise spirit. Developing nations have come to realize that economic growth has been hindered by government bureaucracy and inefficiency. In many cases, state-owned enterprises have failed to improve the quality of life in developing nations and more and more funds have been diverted to stabilize these enterprises at the expense of the people.
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Privatization has been a major issue in developing countries since the mid-1980s, albeit under different names; “disincorporacion” in Mexico, “capitalization” in Bolivia, “divestment” in India or “peoplisation” in Sri Lanka or “equitization” in Vietnam. Whatever its label, the pace and scope have differed widely across the countries. While some states have move rapidly to divest themselves of their public enterprises, some others have progressed at little more than a snail’s pace, selling only a few strategically or some unimportant state assets. In addition privatization has displayed “ebb and flow” characteristics within some countries, gaining momentum during certain period, but coming to a virtual stop during others.
Widely spread of developing countries in two continents of Asia and Africa plus countries in Latin America will be the base of later comprehensive overview on privatization.
Africa: Sub-Saharan is chosen as a sample area of Africa because it is a region dominated by a high concentration of developing countries. Pamacheche and Koma (2007) by emphasizing on low level of human development, low levels of productivity, poor investment climate and poor infrastructure in Sub-Saharan Africa, conveyed this message that privatization is in the interest of Sub-Saharan African countries, both in terms of poverty alleviation and enhancement of the integration process of the continent. Although, as Buchs (2003) mentioned, privatization became a central element of economic reforms in most countries in Sub-Saharan Africa during the 1990s, putting increasing emphasis on private sector development aimed at enhancing the efficiency of resource allocation via increased competition, providing fiscal benefits to cash-strapped governments, attracting more private investment and improving the access of the private sector to finance in general.
The main lessons from the experience of privatization in this region were drawn by Buchs (2003) as:
General perception problem with the achievements of privatization, linked to unrealistic ex-ante expectations. 124
General recognition that privatization has been heavily donor-driven, which has generated a reform ownership problem and sometimes an unfortunate bias in the sales price negotiations.
Privatization has created new political patronage opportunities, which need to be addressed in order to reestablish credibility in the privatization process.
While creating a competitive framework, privatization is only a necessary condition but not a sufficient one.
The distributional impact of privatization has, by and large, been overlooked.
The reputation cost of some big corruption scandals involved in privatization transactions has contributed to discrediting privatization programs in many countries and this has led to a major perception problem about the credibility of privatizations which is now difficult to overcome.
For sure, political commitment, proper transparency, regulation and competition frameworks are still at the forefront of privatization concerns. This suggests that institutional transformation and by extension, fundamental changes in business environments have been the weakest link in the reform agenda and have undermined the operational credibility of privatization.
Latin America: More than two-third of Latin American countries considered as developing countries. Latin America is the region with the largest decline in the state’s share of production in the last three decades. And overall, privatization leads not only to higher profitability, but also to large output and productivity growth, fiscal benefits, and even quality improvements and better access for the poor.
Nellis et al. (2004) stated that privatization in Latin America started earlier and spread farther and more rapidly than in almost any other part of the world. Despite positive microeconomic results, privatization is highly and increasingly unpopular in the region. The core social criticism is that privatization contributes to growing 125
poverty and inequality levels in Latin America—and anecdotal evidence supports the claim. But recent and rigorous studies paint another picture concluding that privatization has contributed only slightly rising unemployment and inequality and that it either reduces poverty or has no effect on it.
Chong and Lopez-de-Silanes (2003) demonstrated a few results of privatization in Latin America as substantial gains in profitability after privatization, where main reason behind the profitability gains is the improved operating efficiency brought about by privatization. The impact on sales-to-employment is dramatic, labor retrenchment is a significant component of the privatization experience as privatized firms reduced a substantial percentage of their workforce in almost all countries of Latin America and these all are mostly because Latin America underwent major economic transformations as countries embraced liberal policies and opened up their borders during the 1990s.
The objectives of privatization in Latin America, on the whole, were multiple in natures, so it is not easy to establish the priorities among them. Fiscal benefits have been a driving force and convinced the governments in several ways: the drain on the public exchequer caused by loss making public enterprises would be eliminated; the government would gain from high tax revenues from enterprises that were rendered profitable through privatization; the government would not have to find funds for investment in public enterprises; the government could retire public debt, resulting in a reduction in the interest payments year after year; and the government would begin to command resources for the sake of social expenditures.
Guriev and Megginson (2007) stated that improving the efficiency of the enterprises has constantly been in the minds of the governments, faced with the alarming financial and production conditions of many public enterprises. The situation was feared to be so incorrigible that privatization was the solution. A more distinctive focus on efficiency as the primary objective of privatization would offer several advantages:
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Any enterprise whose efficiency could be enhanced only through privatization can be privatized independently of overall economic policies.
The choice of modality of privatization—whether by divestiture or non- divestiture—can be attuned to the motivation of improving efficiency, rather than to the mere selling of the enterprise to the private sector.
With efficiency as the declared aim, the need for monitoring privatization and for regulation of privatized operations becomes self-evident in the process of ensuring that the aim is realized.
Another aspect of the privatization techniques adopted in Latin America which deserves specific notice is that there have been many franchises or concessions, under which some kind of a public-private venture comes into being leased for periods varying between 10 and 95 years. Foreign capital also has played an important role in the privatization of many large enterprises in Latin America. It is widely recognized in the region that the regulatory processes have not kept pace with the needs of privatization. In some cases attempts are being made to establish a regulatory framework with such limited aims as giving guarantees to the strategic investor. The pre-eminent importance of a competitive environment for the success of privatization economic reforms and structural adjustment programs does not seem to have been fully brought.
A summary of some empirical studies of privatization in Latin America will help to general privatization overview in this area.
Ramamurti (1996) discussed political economic issue, methods used to overcome bureaucratic, ideological opposition to divestiture and concluded that privatization in Latin America had a very positive impact especially for telecom, partly due to scope for technology, capital investment, and attractiveness of offer terms. La Porta and Lopez-de-silanes (1997) demonstrated increase in output of privatized firms, while employment declined by half and increase in operation profitability. Estache (2003)
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found that privatization per se, was quite successful from the viewpoint of state revenue, operation efficiency, and service level. But once the economic crisis began, governments’ actions relatively discriminated against the privatized companies and foreign operators were vilified as exploiters when they tried to raise fees in line with inflation and devaluation.
To confirm the impact of fiscal deficit on privatization Clark and Cull (2001) pointed those provinces of Argentine that with high fiscal deficits were willing to, first, accept layoffs; and second, to guarantee a larger part of the privatized bank's portfolio in return for a higher sale price.
As many other developing countries, institutions and regulation was the serious obligation in the process of successful privatization in Latin America. Chong and Sanchez (2003) concluded that clear, homogeneous, transparent and credible institutional processes during privatization yield positive outcomes. This can be consistently added to the finding of Sanchez and Corona (1993) that firms, institutions and regulations need sufficient time to prepare for the privatization process to be successful.
Asia: For the period of 1990-1998, while 56% of privatization revenues in developing countries were allocated to the countries of Latin America and Eastern Europe had got a 14% stake, Kriegsmann (2000) demonstrated a 25% stake of this revenue for South, East, and central Asia, addition to remained 5% as a share of Africa. As an approach to the privatization in developing countries he concluded that:
Privatization programs are guided by a blend of ideas from modern theories of the economics and organization and institutional design including property rights theory, transaction costs economics, and agency theory.
Deregulation to allow competitors to enter markets is a big driver of; strategic, organizational and cultural change and improved performance in the SOEs.
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Changes in the competitive environment have to be introduced before or parallel to corporatization, to reduce uncertainty in planning for privatization.
Clear separation of commercial activities from; policy, regulatory, and social functions is critical in establishing accountability and improving performance.
Comprehensive industry, institutional and organizational reviews prior and during corporatization are useful for developing a coherent privatization plan and avoiding transaction problems.
Influences to be dealt with during transformation or corporatization include pre-transition conditions, preparatory mechanisms, the competitive environment, and agency and governance mechanism.
Thorough reorganization of the SOE is critical. This includes defining core businesses and strategies, aligning the organization design with the new strategic directions and improving employment systems.
Transformational change is best carried out rapidly rather than in an evolutionary manner. However, rapid and effective organizational and cultural change requires leadership skills and clarity of vision, management synergy, appropriate organizational structures, the reform of work practices and incentive and reward systems, explicit cultural change programs, and a structured and sustained investment in management and staff training and development.
Boubakri, Cosset, Guedhami (2003) examined the post privatization performance of newly privatized firms in Asia and documented how the private ownership structure evolves over time. They showed that privatization leads to an increase in profitability, efficiency, and output in former state-owned firms from Asia. However, these changes are generally less significant than those reported in other developing countries. They also found that higher improvements in performance are associated
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with certain aspects of corporate governance and the economic environment and also indicated that governments generally do not relinquish control and private ownership concentrates over time.
Despite the very much expanded area of Asia continent, there are very few comprehensive studies on the subject of privatization in this area, excluding China and India. It is partly because of limited data which their correctness are not usually approved by international organizations and mostly and partly because of tremendous differences in political (with an emphasis on geopolitical aspects) and economical structures within the Asian countries that makes generalization a very hard task. More than that, most of this studies that has been done country by country are a sort of local production, made by locals, under the direct or indirect observance of the local policy makers and executers of privatization or under their financial supports which all together render uncertainty for the conclusions. However, apart from the cases of China and India, there are not many impressive and distinguished plan and execution model of privatization in this continent to be remembered or be named over the time except a very few successful example.
As repeatedly mentioned before, privatization in developing countries are mainly influenced by political factor. This fact is confirmed in studies for many countries. Reid (2006) noted that despite of so many claims of reign government of Jordan about the interest and intentions of implementing the privatization for a number of years, yet no projects have been attempted so far. He reasoned that such a slack are because the royal regime does not show any interest to implement the SOEs’ preparation actions prior to their transfer to a private partner and not possesses requisite monitoring capacity to ensure the fulfillment of contractual obligations of the privatized entity.
Guerin (2006) submitted that although privatization in Indonesia was seen necessary as a part of revenue-generating, attract new portfolio investment along with additional capital investment, management skills and corporate-governance practice. But
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recently they intend to buy-back some stake of privatized firms as they think of them as the state cash cows ever ready to help finance and budget.
Shahriari-Rad (2003) demonstrated how the privatization in Pakistan has always been influenced by political instability, resistance to privatization from various sections of the society such as pressure groups with a stake in the SOEs and Islamic fundamentalist organizations opposed to westernization and also the continues ambiguous behavior towards investors. In addition, features common to many developing countries complicated and delaying administration bureaucracies, the insufficient size of the local capital market, and lack of developed institutions create hurdles for the country from achieving the objectives laid down by its state and the international donor organizations.
Although in developed countries the adverse effects of monopoly for the consumers has been solved through many reforms including privatization but yet, it seems that it is not in its place in developing countries.
Jomo and Syn (2006) suggested that in Malaysia, desired improvement cannot be achieved through privatization, since there has been little evidence of increased competition associated with privatization. Some of the selected enterprises already privatized or expected to be privatized, are natural monopolies. Thus, if privatization merely involves transforming a public monopoly into a private monopoly, consumer welfare may well be adversely affected. In such circumstances, even greater enterprise efficiency may not necessarily enhance consumer welfare, but only the monopoly profits accruing to the privatized enterprise. In Malaysia, there is some uneven evidence suggesting improvements in various aspects of some firm performances following privatization. The problem here is that such improved performance may be wrongly attributed to changes in ownership per se, without any conclusive evidence of such causation. Efficiency gains, for instance, may well be due to other changes coinciding with, but not caused by, the change in ownership associated with privatization. However, Mohamed (2002) submitted that performance and efficiency of those industries that were under monopoly control of government in 131
Asian countries like Philippine, improved after simultaneous adoption of privatization and competition reforms.
Among the developing countries in Asia, Turkey can be named as one of the rare distinguished example of economic reformers partly by its successful privatization. In Turkey, public enterprises emerged during the 1930s not for ideological but pragmatic reasons, mainly owing to the lack of private capital accumulation and initiative to give first impetus to development. In 1986, Morgan Guaranty Bank provided the Privatization Master Plan by specifying fourteen potential objectives including “making the economy more response to market forces” as the most important objective and “generating revenues for the government” as the least. Various sale methods were implemented by allowing foreign investors to participate. Despite a relative slow proceeding in the years preceding 2005, Kelezoglu (2010) reported that Turkey has now become a magnet for foreign investments and Net FDI inflows have surged to 3.7% of the GNP within 2005-2007. Formerly, the key factors to deter FDI inflows to Turkey, were mainly; political and macroeconomic instabilities; lack of a reform impetus; as well as inconveniences associated with the business environment. However, addition attained political stability and strong commitment to pursue the economic and social reforms by AK party in the power, and apart from the longer-term EU anchor, Turkey’s highly attractive population demographics, regional significance as a bridge between the East and the West, and its strategic location at the energy crossroads, have been pivotal in its attractive situation as an FDI destination.
Drawing some conclusions from the privatization implementations in Turkey, Ghazouani (2005) concluded that:
State completely withdrew from industries like cement, animal feed production, milk-dairy products, forest products, catering services and petroleum distribution sector, and partially withdrew from the ports and petroleum refinery sector.
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The majority of the state shares were sold in tourism, iron, steel, textile, sea freight and meat processing sectors.
Pervasive privatization of public banks has been done.
Public shares in many firms were issued to the public and some to foreign investors to develop the Istanbul Stock Exchange through integration with international capital markets.
During 1998-2005, privatization in Turkey was implemented through five methods of block sale, IPO, block sale and IPO, International offering and assets sales in amount of 10,346 million $ gross revenue. But over the last two years of mentioned period, it chose the assets sales as its first selling method. In 2007 Turkey ranked fifth among all Organization for Economic Cooperation and Development, or OECD countries, in terms of privatization and the sixteenth world’s economic power in 2010 (Daily News Review, Aug. 2010).
India as one of the most democratic country in Asia and among the developing countries has demonstrated a reversed example in the case of privatization. Mohan (2007) indicated that privatization in India generally goes by the name of “disinvestment” or “divestment” of equity. This is because privatization has thus far not meant transfer of control or even of controlling interest from government to anybody else. The government has sold stake ranging from one per cent to 49%, but in no company has its stake fallen below the magic figure of 51% which is seen conferring controlling interest. However, disinvestment received several criticisms. One is that valuation processes were unsound and that the government gave away its stakes too cheaply. Two is that disinvestment has been merely a revenue-raising affair for the government, with little thought being to the requirements of the firms concerned; thirdly, it is contended that the government’s reluctance to disinvest more than 51% and relinquish control over SOEs has meant that the government has been unable to attract suitably priced bids as bidders do not believe the firms performance would improve significantly with small government stake being offloaded. 133
Although as Kapur and Ramamurti (2005) reminded, Indian privatization came out of the shadows however, when in 2002 the Indian President stated, "It is evident that disinvestment in public sector enterprises is no longer a matter of choice but an imperative”. Though clearly gradual, India’s commitment to privatization did escalate steadily, through the 1990s. First, the government’s privatization program began as a divestment program. The policy aim was merely to reduce the government’s holdings by up to 20 percent, principally to raise resources to reduce the budget deficit. Second, the government expanded the range of sectors in which SOEs could be sold. The term “strategic” was frequently used to describe those state-owned enterprises (SOEs) that the government intended to retain control of over the long term. Finally, the restrictions on who could buy SOEs also declined progressively.
Gradualism is one of the distinct characters of Indian privatization with many lessons to be learned of it. From a politico-economic perspective, India was not a likely candidate for rapid privatization. Economic liberalization, including privatization, is generally thought to take place more often when there has been a severe macroeconomic crisis including high inflation, and when there is a strong executive that can ram policies through reluctant legislatures. India had neither. Most analyses of the political economy of privatization blame the slow pace of reform on the nexus of self-interested rent-seeking politicians, bureaucrats, and labor unions.
Gradualism, however, has potential advantages that tend to be overlooked, both for consensus building as well as avoiding serious mistakes. The latter poses serious political risks, since it can become a lightning rod for those opposed not just to privatization but to economic reforms per se.
Kapur and Ramamurti (2005) analyzed the advantages and disadvantages of gradualism in privatization from the identified evidences of India’s experience. Disadvantages of gradualism in privatization are described as:
It gives opponents of the program time to organize their resistance.
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The performance of SOEs deteriorates in the run-up to privatization if there is uncertainty about policy intent.
It reduces investor confidence in purchasing SOEs or their shares.
On the other hand, the advantages not to be ignored are:
It increases the likelihood that complementary, efficiency-enhancing reforms, such as deregulation and liberalization, will be implemented before or alongside ownership changes.
It gives policymakers time to build support for and consensus on privatization.
It provides the opportunity for policymakers to incorporate lessons from earlier rounds of privatization in later rounds.
It affords time to implement policy reforms that complemented privatization—reforms that countries privatizing in a rush generally did not implement or implemented poorly.
Merely delaying privatization does not guarantee the realization of these advantages, but it does make them possible so long as governments keep up some forward momentum in privatization. This momentum was kept up in the Indian case, because of the government’s high budget deficit and globalization.
Mohan (2005) concluded that as part of the economic reform program, and in line with prevailing economic thinking, India has been privatizing its large, ungainly public sector, may be because their inefficiency could be improved by privatization. But on the contrary, the dominance of family business, rather than professionally managed firms, and the level of corporate governance are important constraints on the privatization improving process in India. Mohan (2005) also showed that revenue- raising considerations have weighed more heavily with the government than efficiency objectives. Board base shareholdings of public-sector firms, not sale to 135
private group, should be the preferred route to enhancing efficiency at public sector firms.
1.2.6.4. Privatization in China, a Claimed Implemented Model in Iran
During the five years (2005-2010) of privatization in Iran, there can be find one and only one statement from the key responsible people pointing the privatization model implemented in Iran. The managing director of Iran Privatization Organization (IPO), Kord-e Zanganeh (2009) claimed that “We are in such a situation that we are compelled to follow the Chinese privatization method…at the moment, it is to our best interest to privatize SOEs in this way (selling asset to government-similar/semi- government institutes), the same that China did its privatization in two phases then, in the second stage the semi-government institutions will gradually re-offer their shares to the private sectors.”
No doubt that China with the communist structure has been able to gain tremendous efficiency among its co-school countries. But yet, there is an important question of how its privatization will be ended? Coincidently, there are other important questions to be answered by those who propound copying the Chinese model in designing the privatization plan of Iran as:
How can a country like Iran with strict anti-communist structure and ideology prefer a model of communist country?
Why such a method that has an ambiguous result and consequence should be chosen?
What is the indicated situation by Kord-e Zanganeh that has forced the government to copy the Chinese model and not any other?
Who and when is supposed to provide the description of “best interest” as Kord-e Zanganeh mentioned?
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China as a second largest economy on a purchasing-power-parity basis launched a major economic reform and liberalization program in the late-1970s that has transformed the productivity of the Chinese economy. Lau, Qian, Roland (2000) showed how the Chinese have successfully followed a dual-track approach to market liberalization.
The Chinese Communist Party recently committed the country to a massive privatization program [Lin (2000)] under the slogan “seize the large, release the small” (zhuada fangxiao) which roughly translates as privatizing all but the largest 300 or so SOEs. Assuming this plan is even partially implemented, the result will be a privatization program of unprecedented scale.
Guriev and Megginson (2007) clearly identified the reasons to believe that China’s privatization program will do little to lessen the state’s role in economic decision- making, either at the macro or micro-economic levels. For one thing, the ownership structure of Chinese stock companies is unlike anything seen elsewhere in the world. Only one-third of the stock in publicly-listed former Chinese SOEs can be owned by individuals; the remaining two-thirds of a company’s shares must be owned by the state and domestic institutions which are invariably state-owned. So called “A- shares” allocated only to Chinese citizens, while “B-shares” are stocks listed in Shanghai or Shenzhen that may be owned and traded only by foreigners. Other shares are listed in Hong Kong (H-shares) or New York (N-shares), and these are also restricted to foreigners. The net effect of this fractionalization of ownership is that, even in publicly listed former SOEs, control is never really contestable and the long- term financial performance of privatized Chinese companies has been quite poor. To Guriev and Megginson (2007), the key constraint is the fact that SOEs, rather than the government itself, serve as the country’s social safety net. Chinese SOEs are burdened with many social welfare responsibilities. Thus it is difficult to imagine the government adopting a privatization program that would either grant these firms discretion over staffing levels or subject them to truly enterprise threatening competition. In sum, the long-term prognosis for privatization in China is unclear;
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there is great scope for such a program to have a dramatic impact, coupled with great danger of social turmoil if handled (or sequenced) incorrectly.
Facing the political and ideological constraints, privatization in China was initiated by some city governments. Although the endorsement of the central government in the late 1990s is critically important for a nationwide privatization, in general it is city governments’ decisions on whether privatize and how to privatization for SOEs (COEs) within their jurisdictions.
In China certain privatization method and specifically management buyouts (MBOs), which account for close to half of all privatization programs, are successful in improving the performance. That is because city government withdrew from corporate decisions in MBO firms and they are more likely to changed members of core management team, adopt international accounting standard and professional independent auditing, and to establish board of directors.
In contrast, non-MBO privatized firms did not take major restructuring measures and city government still intervene their operations. Not surprisingly, those privatization programs did not improve performance.
Gan et al. (2008) explained that “employee shareholding” was the main method to be implemented at the first stage of the privatization. Then buy-out to the managers MBOs came to the scene. At this stage, when conditions were ready for managers to take over they bought majority shares from employees. In recent years, as privatization proceeds, open sale becomes a popular approach. And firm is openly sold to insiders, mostly managers, or outsiders, such as other firms or outside managers, through auctions or negotiations between local government and potential buyers. The last major approach is leasing. Lessee can be outsiders, who are owners other firms, and insiders. To the finding of Gan et al. (2008) share issue privatization was only a tiny proportion (1%) of all privatization programs.
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In the Chinese case, a big political objective in many regions is employment. This is one of the reasons to show that state control reduces efficiency because they do not let the firms to lay off excess workers based on economic considerations. But gradually it has became evident that many of the city government have a tendency toward slighting their control and thus greater likelihood to lay off excess worker as a mechanism of improved efficiencies for MBO firms.
China’s privatization provides several insights into privatization in general. First, the Chinese experiences highlight the importance of both the commitment of the government not to intervene in corporate decisions and the incentives of large shareholders. Meanwhile, only when the large shareholders’ incentives are in place, would will the firms undertake fundamental restructuring measures to enhance efficiency. Second, the Chinese experience suggests that postponing privatization to accumulate create stable market institutions increases the effectiveness of privatization. In particular, the privatized firms can benefit from the established labor markets for managerial talent and from better developed financial institutions to obtain external financing. Finally, established capital market can provide an exit strategy for the new owners to capitalize on the efficiency gains.
Privatization in China was initiated after several earlier attempts of enterprise reform failed. At that point, most of the state-owned enterprises (SOEs) were hugely unprofitable and had zero or negative equity. As a way to avoid heavy costs of complete restructuring, the government organized many SOEs into a parent/subsidiary structure, where the most profitable assets were carved out for public listing while the parent companies became the largest shareholder and kept the excess workers, obsolete plants, and debt burdens. These parent companies had strong incentive to expropriate corporate assets at the expense of outside minority shareholders and they did so.
It is well known that China’s gradual approach to reform has not brought about strong legal protection of property rights. Regulatory enforcement, which could be an alternative to judicial enforcement, was lacking as well. As in many emerging 139
markets, the almost non-existence of corporate governance in China further made it possible for large shareholders to expropriate.
Deng et al. (2008) identified four types of potentially expropriating transactions. The first is transfer pricing or goods and services provided by the largest shareholders, such as the sale of products, the purchase of raw materials, and the rental of plants and equipment. Conceivably, the largest shareholders can tunnel cash out of their subsidiary firms by setting unfair transfer prices. The second is sales of assets to the listed companies. Thirdly, large shareholders can force listed firms to provide generous trade credits for the business transactions in the form of accounts receivable and advanced payments. Lastly, can be named as dividend policy by which large shareholders prefer paying fewer dividends, so that corporate resources are kept in the firm and under their own control.
In fact, Deng et al. (2008) provided three contributions through their empirical study. First, they provide an explanation for why China’s share issue privatization, by far the largest in history, has achieved only limited success. They show that large shareholders created during the privatization process and their incentive to expropriate underpins the limited success of China’s privatization. Second, they extend the privatization literature by pointing out that large shareholders created during the privatization process and their incentive to expropriate are an important determinant of privatization outcome. Finally, suggested that there is a large loss of economic efficiency as a result of expropriation. Expropriation is not a zero-sum game and incompletely restructured firms underperform beyond expropriation itself.
1.2.7. General Conditions for the Success of Privatization
Generally, the success of privatization is one of the most important points in the study area of researchers who have approached many worthy findings.
Privatizing utilities and natural monopolies are most difficult in less developed or developing countries where institutional and regulatory capacities are weak. Although not limited
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exclusively to low-income economies, the problems of post-privatization regulation and competition policy as well as implementation and political constraints are strongest among the poorest countries. The absence of certain economic conditions such as: developed capital markets, competitive goods and services markets, and effective regulatory capacity make privatization difficult.
The decision to privatize or not, should depend to a large extent on the associated costs and benefits and those in turn, depend on how a variety of reforms are sequenced and the speed with which the reforms are implemented. Economic crises may well be a ground for swift privatization, as argued by many authors, but privatization under such circumstances does not necessarily yield the desirable economic outcomes.
Given that privatization is a tool which governments use to achieve the same objectives that initially motivated the creation of SOEs some decades ago, it is not surprising that privatization will be most difficult in those countries where conditions responsible for a weak private sector have changed the least. The current literatures on privatization suggest that many middle income countries are equipped to successfully privatize enterprises and that the overall results tend to be positive, particularly for financing investments when governments cannot afford. However, privatization in and of itself will not be beneficial without macroeconomic stability, liberalization and deregulation.
For low-income countries, a precondition for successful privatization is to create an enabling environment in which the private sector can effectively operate. Those include macroeconomic reforms, improving regulatory frameworks, strengthening the financial system, reducing barriers to competition, deregulating product and factor markets and improved governance.
When countries are not yet at a stage where it is politically or economically feasible to embark on a privatization program, then privatizing management, asset leasing, franchising and management contracts can lead to important economic benefits without having to change ownership. In general, any reform that increases the competitiveness of the economy helps to reduce corrupt incentives and naturally is a step toward success of privatization. Political 141
interference with regard to the operation of a public enterprise is a strong motive for eliminate or postpone the success of privatization.
Shahriari-Rad (2003) concluded that the road to privatization is not easy, and it will not come about by itself. First and foremost, it requires a strong stable political will and the highest commitment from policy makers. Political leaders need to make extraordinarily tough political and economic decisions. Privatization also requires the respect and the understanding of business leaders as a good image of owners of wealth. Its success depends on their willingness to take risks and their faith in the future of their country. Finally, privatization can succeed only when the private and public sectors collaborate with each other through the whole procedure.
Privatization’s success depends on many variables, and there is a large scope for empirical research to measure their relative importance.
The privatization experiences indicate that financially hard-pressed governments have chosen privatization because of a growing recognition that ownership matters in improving on the performance of an enterprise. And the bottom line is that since ownership matters, moving ahead with privatization is very strongly in the interest of governments, because it enables privatized firms to operate more efficiently and enables governments to concentrate on things that only governments can do such as: fighting poverty and putting in place the tangible and intangible infrastructure that is necessary for economic growth.
The studied global experiences highlight some key lessons as:
Privatization works best when it is a part of a larger program of reforms to open markets, remove price and exchange rate distortions, and develop an adequate legal framework for private business. Privatization is easier to launch and more likely to produce positive results when the company operates in a competitive market and when the country has a market-friendly policy environment and good capacity to regulate.
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Preparation for sales is essential. Probability of success exceeds for governments that have been successful in divesting enterprises brought in dynamic private sector managers, settled past liabilities, and shed excess labor in preparation for sales, especially in the sale of large firms. Transparency, or openness, is critical for success. Mexico and East Germany are from the best examples that sold thousands of enterprises in a transparent and speedy way by adopting competitive bidding procedures, developing objective criteria for selecting bids, and creating a clear focal point with minimal bureaucracy to monitor and supervise the overall program. Need for strategic clarity is an important lesson to learn from the UK privatization policy. This involves setting and ranking objectives explicitly and then designing a privatization strategy accordingly. The objectives of privatization evolved with the passage of time and the emphasis given to particular objectives has been varied in each individual case (Veljanovski, 1989). Privatization is a political process, and governments should expect opposition to emerge at several stages. Opponents may well argue that it is better to keep a given corporate candidate in the public sector; they may oppose the details of the sale and the valuation and justice of the system chosen. To encourage the small investors to take part in the privatization program, the UK developed a range of special incentives designed to enhance interest in purchasing and holding shares such as: share payments in installments, share bonus arrangements, discount on the second and the third installment, and, the issuance of sale vouchers. For the countries like Iran, It is indeed hard to copy this experience to respect for the entrepreneurial ethos and the rights of the individual that allowed financial institutions to develop and flourish in an environment regulated by an independent judiciary. But this was what allowed the UK to be a leading contributor to regionalization and globalization. The developed and developing economies and cultures have different social and economic priorities, which may require different routes to reform. The industrial countries already have well-established social and economic infrastructure and their motives are to maintain and renew the system. Whereas the developing countries are in 143
the process of planning and development, and it will take significant time to reach an equivalent level.
1.2.8. Concluding Remarks
1- Less competition, greater political intervention and weaker corporate governance are strong theoretical arguments against state ownership (Clarck et al., 2003). 2- Underdeveloped capital markets, weak court systems, inadequate procedure for bankruptcy or takeover will all prevent privatized firms from performing efficiently, especially in developing countries where these market and institutional failures are common (Megginson, 2005). 3- Corporate governance generally, and corporate legal systems specifically, significantly influence capital market size, ownership structure, and efficiency. Therefore, developing an effective value-maximizing system of corporate governance is an increasing concern for most nations, doing so becomes a political and economic imperative for countries wishing to launch privatization schemes, particularly share issue privatization programs (Gurieve and Megginson, 2007). 4- Privatization, could play a serious role in the quest for growth and it is widely promoted as a means of improving economic performance in developing countries (Easterly, 2001) and it positively affects GDP growth (Plane, 1997). 5- Incentives play a significant role in the potential success of privatization as a factor of economic growth. In fact, privatization, accompanied by appropriate structural reforms, creates incentives to improve economic efficiency, increase investment, and adopt new technologies (Easterly, 2001). 6- The success of privatization largely depends on the government commitment to legal and regulatory reforms. The lack of appropriate governmental reforms might cause a negative relationship between privatization and economic growth (Shahriari-Rad, 2003). 7- Underdeveloped capital market, weak court systems, inadequate procedures for bankruptcy or takeover will prevent privatized firms from performing efficiently, especially in developing countries.
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8- Privatization success in developing countries depends on country and market conditions (Kikeri, Nellis, Shirley 1994). 9- Privatization success elements in Transition Countries are; intention towards market oriented economy (Guriev and Megginson 2007) outside owners (Frydman et al., 1999) structural reforms over both initial conditions and macroeconomic variables (Berg et al., 1999) competition (Carlin et al., 2001) 10- Main characteristics of UK model (best practice for developing countries) are: sequence structure, identifying the right buyers, comprehensive feasibility study and privatization action plan, precise share and assets evaluation, developing a regulatory framework, appointing a unite in the Treasury to undertake the co-ordination of the procedure. 11- In the absent of relevant institutional environment such as private property rights protection, rule-of-law, hard budget constraints, competition and regulation, the privatization will not work. 12- Successful privatization requires strong political will-highest commitment of policy makers-an enabling environment for private sector operation-transparency and consolidated plan of actions.
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Part 2
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2.3. Chapter Three: TOWARDS DRAWING A SCOPE FOR THE CONCEPT AND EXECUTION OF PRIVATIZATION IN IRAN 2.3.1. Chapter summery
This chapter provides a wide scope of privatization in Iran by giving a general introduction for the past four decades and focusing on three main areas. First area includes a focus on the major related institutes, laws and policies that are the fundaments of privatization in Iran. Second area describes the detailed framework of privatization in Iran at its major peak period started from 2006. Third area explains the main characters and elements of the designed privatization plan of Iran and analyzes the results of implementing that plan.
2.3.2. The Weight of the Past, 1960-2010 2.3.2.1. Historical background –Private versus State Ownership
The beginning of privatization program in Iran was formed as part of an overall economic adjustment plan proposed by financial organizations such as the World Bank and IMF, which arose from internal needs and advice from abroad predicated on the need for a workable model from which to begin the economic rebuilding process. Shahriari-Rad (2003) strongly emphasized on reality behind the process of “advice from abroad” in the past half century in Iran. Deepening in the world wide experiences by intention of benchmarking for best selection has always been one of the rational solutions for the governments, especially in the economical area. But obviously this kind of search and selection which still is a kind of model selection from abroad has a distinct cause and impact from getting an advice from abroad. In fact, all the economical models in the time period of 1960 to 1979 was dictated in Iran by USA or blindly copied from American modules by claiming of localizing them. Shahriari-Rad (2003) refers to the era during 1997 to 2004, where, there had seen some sectional actions without any specific advice from abroad but with defective and inadequate laws and regulations, and especially with languid interest revealed by different beneficiary groups including the clergy, politicians, unqualified governmental managers, revolutionary institutions and organizations and some other unofficial but authorized pressure groups. However, from 2005, there appeared a 147
surprising amalgam of decisions and processes could doubtfully be the result of benchmarking for the best selection and certainly the coming future should identify the intentions and reasons behind. But, consideration of all the above situations and intentions, leads to presume that the need of privatization in Iran came from local circumstances and the model came from abroad. There is no doubt that utilizing the other’s experience facilitates the process, lessens the costs. But when this becomes an intention to amalgamate the existed experiences, not on the bases of expertise intellect, then the important question rises that, what may be the product of assembling of ‘local need and amalgam model’? Will it make any contribution to the development of the national economy? Or, is it an arena of trial and error, as the country has experienced in other fields of the economy? Do the ruling authorities learn anything regarding the incompatibility of the Islamic economic model in the context of the contemporary world? And will the policy makers accept that the global experiences worth to be studied without any prejudice and inflammatory slogans? To respond to the above, it is worth mentioning a brief description of privatization during 1960 to 2009.
2.3.2.2. From White Revolution to the Islamic Revolution: 1960s to 1979
The White Revolution was the name given to a series of social and economic reform programs that were initiated by the Shah (Mohammad-Reza Pahlavi), during the 1960s. The original programs of the White Revolution included:
The land reform program to redistribute the holdings of major landlords among the land-less peasants who worked on the land.
Nationalization of forests.
Sale of state-owned enterprises to the public.
Workers profit-sharing in 20% of net corporate earnings.
Voting and political rights for women. 148
The setting up of the literacy corps.
An important principle of the White Revolution was the promise that state enterprises would be sold to the public, and more than 40% of total factories of those destined for sale were subsequently sold either wholly or in part. In addition, the 1975 Law for the Expansion of Ownership of Productive Enterprises called for 49% of the shares of large, private industrial firms, and 99% of the shares of state industrial units (except strategic industries) to be sold to the workers of each company, and then to other workers, farmers, and the general public. Shahriary-Rad (2003) resulted that as acknowledged even by critics of the Pahlavi regime, the expansion of public sector ownership and management did not crowd out the private sector; the domestic economic boom generated by soaring public expenditure served as a great stimulus to private entrepreneurs. The mining and manufacturing sector that was given the pivotal role in the development process was expected to serve as a powerful driver for growth through its backward and forward linkages in the economy. The rapidly rising oil revenues, surrogating as enormous and painless national savings, fuelled the expansion without the historical necessity of belt-tightening, or heavy foreign borrowing, no distinctive agricultural improvement or poverty alleviation resulted from the land reform.
2.3.2.3. The First Decade of Islamic Revolution: 1980 to 1989
The Iranian economy has, since the 1979 Islamic revolution, been in a state of continuous crisis that has been engendered largely by the conflicting political and legal interpretations of the ideological objectives of an Islamic economy, and the nature and functions of the state in an Islamic society. Economic manifestations of this crisis have been reflected in the insecurity of private capital and property rights, with detrimental effects on the process of production in general, causing hyperinflation and unemployment, shortage of basic domestic productions and stagnation of the economy.
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Rahnema & Behdad (1996) briefly explained that, at the time of the revolution, Iran faced numerous problems, particularly the absence of adequate governance, and of law and order. In this state of vulnerability and insecurity, a huge amount of money was looted from banks and private enterprises. Much capital was transferred abroad and the fear of insecurity and instability drove many people to escape from the country. Most of the banks became bankrupt due to huge overdrafts, fictitious promissory notes and excessive borrowing without the provision of proper guarantees. Even on the eve of the Revolution, as an opposition tactic mechanism against the Shah, most of the factories were on strike, which caused huge financial losses. After the Revolution, when the banks wanted to collect their dues the companies had no means to pay. These problems were further aggravated by international sanctions, reduction in oil revenue, and the Iran-Iraq war (1980-88). All these factors forced the government to nationalize banks and other financial and industrial institutions. In other words, as Motavasseli (1995) indicated, 938 companies, which had been under private ownership, came under the control of the governmental organizations.
Shahriari-Rad (2003) argued that in spite of these efforts the outcome was not encouraging as the uncertainty inherent in such a system continued to be one of the regime’s major handicaps. With the change of ownership of enterprises, the government became a major employer and its bureaucratic control and inexperienced management led to a big decline in the efficiency of these enterprises.
In such a condition the process of privatization is not a simple and straightforward phenomenon, and is particularly true in the case of Third World countries like Iran where, the political personalities may be more dominant than the state institutions. Discussion of privatization in Iran would remain incomplete without discussion of the role of influential political and other pressure groups, which have played a significant role in national decision-making throughout the history of the country during the past thirteen years.
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During 1980-1988, parallel to the involvement of the whole country in the war (titled as Iran-Iraq Imposed War), yet the role of interest and pressure groups were apparently exaggerated. Shahriary-Rad (2003) described some example of the above mentioned role such as privatizing the DENA TYRE Company in 1992, not through the prescribed procedures of an open auction or the stock exchange, but rather by sale to a religious foundation, which was headed by the chief of the Judiciary of the country. It is noteworthy that this company was sold not on merit but on political grounds. Thus, it received preferential benefits from the government, which were in the interest of the buyer rather than the public such as tax exemption, state audit exemption, highest foreign exchange credits, market monopolies and import priorities and facilities when, the import of various industrial items has been completely banned except in some special cases. The message from this example is a treatment against the spirit of the privatization idea which was a direct impact of the influential role of the pressure groups. In fact, it was an example of many others.
2.3.2.4. The Second Decade of Islamic Revolution: 1990 to 1999
In 1988, by the end of imposed war with Iraq, under the appeared circumstances, the political leadership finally decided to introduce a structural adjustment aimed at the liberalization of the economy, including privatization. By relying on the content of the Constitution Law, specially Article 44 (Appendix 1) and launching of the five- year development plan for the first reconstruction period (1989-1994) the government set the stage for the new direction toward deregulation, privatization, free enterprise, and a return to the mechanisms of the free market. Later on, several hundred state enterprises were offered for sale to the private sector through the stock exchange and other means. Shahriari-Rad (2003) reported that in contrast to the early policy of avoiding foreign financial assistance considered a threat to economic independence, government began to seek long-term external credit from the World Bank and elsewhere. In general, despite the various efforts of the government during which resulted the successful sell-off of some companies, this process not continued beyond 1994 due to the lack of coordination between parliament, government and clergy. The
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situation continued until 1996 when the government passed a bill that made them solely responsible for the disposal of the shares of the confiscated, nationalized and public companies, unless it was in the national interest to keep some companies under government ownership. But no significant progress did happened in this regard due to the lack of capital, the obsolescence of the majority of plant and machinery, over- staffing, financial losses and huge debts and over-pricing the shares, being done mainly to preserve the position of certain government officials.
2.3.2.5. The Third Decade of Islamic Revolution: 2000 to 2009
The third decade of Islamic Revolution was an exception phenomena or era for the most issues including privatization. Therefore, it necessitates dividing this decade in two distinguishable parts of 2000 to 2004 and 2005 to 2009.
2.3.2.5.1. The First half of the Third Decade: 2000-2005
In November 1999, Iranian Economy (monthly magazine), predicted that with regard to socio-economic development planning, Iran is on the edge of disappointment. This was one of other similar important hint at the start point of Third Developing Plan (Appendix 2), mainly due to the reason that similar imported models of international lending, not necessarily bad in themselves, were being used without proper consideration of the actual situation and the in-depth understanding of the real problems of the country. At the same period of time, Plan and Budget Organization issued a report indicating that, a few governmental companies still account for 70% of the industrial sector. In the field of banking and credit, the transformation to Islamic banking was carried out without interruption in the internal financial market, largely because the change was essentially limited to the nomenclature. To Shahriari-Rad (2003), the regime’s initial hopes of using the nationalized and “Islamized” banking system as a means of restructuring the economy remained unfulfilled. The Islamic modes that were supposed to shift investment funds away from consumption and non-productive services towards socially justified productive
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projects fell short of expectations. While short-term deposits were easily attracted under various incentives other than interest, banks were less successful in raising long-term deposits, or providing long-term loans. This was mainly due to: fluctuations of money market, variation in the price of Iranian currency (Rial) in relation to major foreign currencies, and politico- economic instability within the country. In fact, by a wide variety of regulations, direction and supervision, the state financial institutions were not able to compete for deposits or loans, and their efficiency steadily declined. The banking system also was one of the poorest performing sectors of the economy. The main reasons of the failure of the banking system were disregarding the new banking concepts, nationalization, appointment of managers on political basis, and, last but not least, the politicians rather than the national interest directed the banking resources. Shahriary-Rad (2003) conducted a survey in 2000 and concluded that the public enterprises are a heavy burden on the government and creator of monopoly in the country and privatization is the only vehicle to attain the target of capital market development and reduce this unnecessary burden. Various parliamentarians in the country strongly advocate the cause of war veterans and oppressed segments of the society, which is in reality, due to their wish to create their own vote bloc. Therefore, privatization should not be a tool to compensate the war veterans and oppressed people. The inadequate foundation and capital market, ambiguity in definition of ownership and an insecure investment climate are of the major problems. Additionally, the laws on capital market, banking, labor, tax and social security should be amended to increase the attraction of private investment. In May 2000, as a result of pressures exerted by different groups on the ruling authorities, a report was conducted and presented to the parliament. The main purpose of this report was investigation and evaluation of the privatization performance during 1990-1996. Shahriari-Rad (2003) pessimistically believed that the preparation of this report was an imposed scenario by the pressure groups including: those involved in the privatization process who desired 153
increased accountability; certain government officials who desired to protect their own interests; certain members of the clergy being disgruntled of not purchasing shares for their so-called charity foundations; those of the new employee class that had assumed positions of power who feared that privatization posed a threat to their status quo; and employees and managers who became angry and disillusioned with the process after failing to acquire shares and their accrued benefits. This study intended to cover 150 companies that had been privatized since 1990. Not included in the report were those shares sold to semi-government and public entities as well as those companies, which were covered by National Iranian Industrial Organization (NIIO) addition to certain other companies as a result of political bodies experiencing conflict of interests and wishing to preserve their status and positions of power. Therefore, the main findings in the final report, containing only 80 out of the original 150 companies indicated that: The objectives laid down by the government relating to privatization had not been followed and as a result huge damage was done to the economy of the country. The majority of share sales were conducted through the Stock Exchange, by tender or through negotiation. However, the procedures governing the operation of these processes were not followed and the government failed to receive maximum benefit and revenue returns. Implementation of the disposal of shares in the NIIO caused a heavy burden to be placed on the government arising from the pricing methods/procedures, implementation methods, and other irregularities specifically in share selling to the company’s employees. For the Stock Exchange tender options on share sales, announcements were placed in the national newspapers but in the case of the negotiation procedures, no advertisement or announcement appeared in the press. Therefore some managers supported by NIIO were given
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special privileges, which gave them access to billions of Rials of the national wealth in addition to many repayment deferrals. In the majority of cases, proper commission and interest was not accrued or received from the debtors. Also, in many cases the schedule of the repayment plan was not followed resulting in repayment deferrals and cancellations (See Shahriary-Rad, 2003, for other irregularities mentioned in the Parliamentary Report). Although, some experts still believe that the individuals who undertook the survey were not qualified experts in the fields of accountancy, statistics and management reporting, as evidenced by the fact that the report contains many contradictions, ambiguities and bias and ignored the responsibility of all officials involved in this process. Furthermore, the main objective of the government at that time was to reduce its involvement in the economy, which was in accordance with the adjustment plan proposed by the World Bank. However, this objective changed some time later showing that the government objectives on privatization were dependent on context rather than an overall plan. The overall view of the first half of the third decade in which the Fourth Development Plan (Appendix 3) should had been occurred was much in line with this argument that slavish implementation of western economic development models, particularly in regards of privatization, was completely inappropriate for Iran. However, in the present global economy it is impossible to ignore the worldwide well experienced models. Indeed, many aspects of these models including capital market development, evaluation of state-society relationships, independent judiciary, technology development, and the rights of the people all need to be interwoven with Islamic and traditional nationalistic views of political economy in Iran. Shahriari-Rad (2003) pointed to the wide political isolation of Iran and the draining of resources during the war with Iraq (1980-1988), and concluded that as a result of this inadequate performance, Iran was experiencing a declining national economy with a reduction in capital formation, one of the 155
keystones for successful privatization. New capital was formed at an inadequate rate; the existing capital base had been eroded. A more recent divide that has become apparent is that between a re-awakening Iranian identity and the revolutionary Islamic-Iranian identity. This tension is gaining momentum, and threatens many aspects of the economic and societal development of Iran. This adds another layer on to an already complicated scenario.
2.3.2.5.2. The Second Half of the Third Decade: 2005-2009
Considering the scheduled timing in the 4th Development, Economic, Social and Cultural Plan (Appendix 3), there was a huge delayed amount of privatization that should have been accomplished by the end of 2010 (latterly extended to 2011). According to the provisions of articles 14 and 15 of Law of the 3rd and Articles 6 and 9 of the Law of 4th Development, Economic, Social and Cultural Plan of Islamic Republic of Iran, the objectives were described as; economic growth, promotion of economic efficiency and productivity of materials and human resources, increment of compatibility and partnership of private sector in economic activities, rationalization the size of the government and reduction of financial and management burden in handling the economic activities. The responsible ministry was the Ministry of Economic and Financial Affairs and the IPO was appointed to take the whole responsibility of the privatization procedure. The execution plan of the privatization procedure was communicated on the base of Article 44 of the Constitutional Law and its Execution Policy (Appendix 5) dictating all the objectives, sale methods, pricing methods, classification of the firms and the three sequenced orders of their privatization with distinguishing the excluded firms in the privatization and etc. Additionally, the policy or action plan of this privatization`s section included a core idea under the title of Justice Shares Distribution. The more explicit and detailed discussion of this idea will be latterly provided in this chapter and chapter five.
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However, as shown in the table 2, a tremendous volume increase of privatization did happen in the second half of the third decade (2006-2009). In fact, there can be defined three major reasons for such an upward trend. First and the most important reason was communication of the policies of the article 44 of the Constitution Law by the Supreme Leader on May, 2005. The communicating, indeed, was reliever for privatization rather than a force, and provides a very extensive opportunity for the government at the time to implement a very pervasive plan of privatization especially in the area of state- owned banks and insurances. Although, in part of public opinion the mentioned communication became an unanswered question that why such an accelerator and facilitator communication of privatization did not happen earlier? Second reason was transferring a good deal of SOEs shares to the semi-government organizations towards the settlement of some portion of government`s debt to these organizations. In other words, this policy was similar to those countries that payback their debts by the revenue of privatization by mistake, instead of re-investing the revenue in a compatible issue with the economic growth of the country. Finally, the third reason was proposing the idea of Justice Shares Distribution or “Saham-e Edaalat” by the government out of the content of Article 44 that received an immediate permission response (Appendix 6) of the Supreme Leader. Although, the proposal was a spontaneous generation with no required laws and regulation, no related organization and no future prediction that all together associate the idea of even no pre-study of what was going to be proposed. However, since 2005, the idea of Justice Shares Distribution became a core idea of privatization plan including the distribution of decided 40% to 50% of each privatized SOEs by the government, among the low deciles population.
2.3.3. The Major Pillars of Privatization in Iran 2.3.3.1. Iran Privatization Organization (IPO)
In 2001, Iran Privatization Organization (IPO) commenced its activity as a governmental company affiliated to the Ministry of Economic Affairs and Finance. 157
Its major mission indicated in Article 15 of the law of 3rd Development, Economic, Social and Cultural Plan was promotion of ownership of production units, share of the companies that are apprised, and their modes of sales and the time-table determined by the High Commission of Divestiture shall be given in trust by their holding companies to this organization to process the divestiture. IPO was authorized to use all the possible methods including de-regularization, outsourcing of the management (like lease, general contracting and management contract) and ownership/possession (like lease subject to possession, sales of shares totally or partially, assignment of the properties), analysis for divesting, dissolution and integration of companies. In other words, its trusted tasks and duties were as a specialized holding company in order to take action for offering and sales of its own shares in sub-companies, according to the rules and regulations. In sum, the mission of IPO was materialization of the aforesaid objectives in 3.2.5.2., with aiming on goals stipulated in its legal articles of association based upon execution of government privatization policies through divesting and sales of SOEs’ shares to the private and cooperatives sectors. In 2006, also the whole procedure of Justice Shares distribution (Appendix 7) delegated to IPO so that in any privatization, IPO should transfer up to 40%-50% of the shares to the householders identified as the lowest deciles groupings through Provincial Investment Companies.
Table2. Privatization Value in Iran, 1991-2010 (billion Rl.*) Transfer Type 1991-2000 2001-2005 2006 2007 2008 2009 2010
Private Sector 8329 19591 3655 45018 40763 119883 14331
Justice Shares - - 21735 177437 142936 - -
Debt Barter - - 27842 31240 59920 - -
Total 8329 19591 26490 250490 214912 179803 14331
% of Total 1.2 2.7 3.7 35.1 30.1 25.2 2
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*Rial (Rl.) is Iranian currency and 1200 Rl. is equal around1$.
Source: IPO Report, 2010
The bottom line of table 2 shows that the highest percentage amount of privatization during 1991-2010, belongs to the peak period of 2007- 2009 with 90.4% of the total privatization. It is also noticeable the government had not justified the fall from 25.2% amount of privatization in 2009 to 2% in 2010 till the date of this study.
In IPO Annual Report of 2009, there has been listed many problems practically experienced in the privatization procedure during 2006-2009. This list is not only important as it has been officially reported by the only direct responsible privatization organization but it is also important when it demonstrates the serious internal discordances between the major involved elements of privatization. More than that, it is in contradiction with many government’s claims that will be discussed more later on. The IPO reported that the main barriers and problems in the course of privatization and particularly as the reasons for delay in the scheduled plan of privatization are:
The lengthy admission process of the firms in Tehran Stock Exchange (TSE).
Disorganized bureaucratic formalities Companies Registration Organization (Edare sabt-e sherkatha) for changing the legal identity of the Limited companies to the Public companies.
Governmental holdings’ avoidance in delivering the share papers of the companies and not providing their financial reports.
Putting the shares of some companies as collateral to prevent privatization.
Claiming the security nature for some companies to prevent of privatization.
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Claiming of sovereignty for some companies by executioner institutes to prevent privatization.
Creating/existing especial problems in any ceding in the area of sport.
Provoking the employees to resist privatization and threatening some buyers.
Pressure to cancel some bidding and vacate the companies.
It is vitally important noting that the source or the cause of all the mentioned problems and barriers (except the two latest) is the government itself through its different channels and organizations.
2.3.3.2. Article 44 of the Constitution Law of Islamic Republic of Iran as the Base of Privatization
The title of Bible of privatization in Iran should be given to the Execution Policies of Article 44 (Appendix 5) even though; the government has not shown enough interest in sufficient paging it through since its announcement on 22 May, 2005 (Appendix 4).
Achievement of the following objectives in the content of the Execution Policies of Article 44 has been indicated as the main goals of privatization.
Accelerated growth of national economy.
Promotion of broad-based public ownership to achieve greater social justice.
Enhancing the efficiency of economic enterprises and productivity of human and material resources and technology.
Enhancing the competitive capability of the national economy.
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Reducing financial and administrative burden on the government encumbered as a result of its controlling role in economic activities.
Increasing the general level of employment.
Fulfillment of these objectives will be through 80% ceding of the shares of listed companies for privatization and leaving 20% of the total shares for the government. It is also explicitly reminded that the government shall not be allowed to engage in economic activities that fall outside those envisioned in Article 44. Moreover, it is obliged to relinquish any activity, including continuation and operation of previous activities and cede them to the private and cooperative sectors by the end of the 4th Economic, Social and Cultural Development Plan (March 2011).
However, one of the ambiguous or crucial tricky issues in the whole content of Article 44 is alternately indicating “non-state” sector instead of “private” sector, like part C of General Policies and Objectives of Article 44. Because in fact, this term of “non-state” has been extensively misused in the whole process of privatization when the government has ceded the majority of the shares to the semi-government institutes by taking hold of this term and consequently has retained the control of privatized firms with a clear contradiction with the objective of strengthening the private and corporate sectors and reduction of government’s incumbencies.
2.3.3.3. Justice Share Distribution
Immediately after the presidential election, the winner (the current president) announced the Justice Share Distribution plan as a key policy to establish social justice by distributing the national wealth. After the vast public propagation of the subject, then he asked The Supreme leader for the execution permission. Naturally, the required permission (Appendix 6) issued and the decree of Justice Share Distribution (Appendix 7) was approved as a By-Law in November 2006, for increasing Iranian households’ wealth through expanding Cooperative Sector’s share.
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The distribution procedure path defined as the flowchart shown in the following Fig.4.
Fig. 4: The Procedure Flowchart of Justice Shares Distribution
Source: IPO Official Website, 2011
According to the approved decree By-Law of the Justice Shares (Appendix 7) the different elements of the above chart is defined as:
The Central Headquarters is established under the presidency of the President.
The Privatization Organization and Holding Company are established under the presidency of the Minister of Economics and Finance Affairs.
High Commission of Divestiture is established under the presidency of the Council of Minister 162
Broker Company of Justice Share is established under the presidency of the ministry of Economics and Finance Affairs.
Provincial Investing Companies are established under the presidency of the Governor of the same Province.
The description reveals the pure governmental identity for all the elements in the flowchart and more than that, two underline issues emanate of the idea of Justice Shares:
First, 49.8% of total privatized volume indicated in the third report of Especial Observing Parliament Committee on the Execution of the Article 44 (here after, EOPC-44) allocated to the Justice Shares that is supposed to be managed by such a consolidated governmental structure at least for ten years (Justice Shares installment duration).
Second, because of forbidding the establishment of any new investment company by the government, the legality and financial source of running all these related companies to the Justice Shares Distribution (Fig.4) by the government are ambiguous.
2.3.3.3.1. Pricing
The explored price resulted of offering 5%-6% share of each SOE in TSE. The ceding price of the Justice Shares for the first two lowest deciles is half of the explored price and 5-10 years as installment duration for all deciles. The installments should be yearly liquidated from the allocated share’s dividends withdrawn by the government. In Article 10 of the related By-Law for the Justice Shares Distribution, the Share pricing mechanism is indicated to be the price index of the company’s share for companies quoted in Stock Exchange Market and the normal business practices of demand and supply. On the other hand, according to the
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third report of EOPC-44, most of the price indices are the result of block offered shares that has been bought by semi-government institutes and consequently with an insignificant participation of the individuals or private entities and therefore, it cannot be construed as the result of normal business practices of demand and supply.
2.3.3.3.2. The Owners
More than 42 million people (57% of total population of the country) have been identified as the six lowest economic level deciles to receive the Justice Shares.
Table3. The List of Identified Lowest Income level Deciles be Distributed the Justice Shares
Identified Groups Population %
Financial disables covered by government and 4,981,514 11.8 semi-government organizations
Unemployed war fighters 3,549,331 8.4
Unemployed and low income villagers and tribes 17,108,577 40.5
Government’s employees and retireds 12,899.969 30.5
Municipalities’ employees 1,499,177 3.5
Martyrs families 1,322,133 3.1
Female guardian labors 8,366 0.02
Servants of mosques and shrines 33,518 0.09
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Theological Students “Tollab” 178,174 0.5
People affected with Hemophilia, MS and 14,939 0.03 Talasemia
Staffs of the Friday Prayers Headquarters 8,571 0.03
Journalists 15,921 0.03
Staff of institutions related to the Justice Shares
Carpet weavers
Activists in the areas related to the Quran
Financial disable freed prisons
Financial disable families female guardians 653,114 1.5
\ Staff and covered people of governmental charities
Registered construction labors
Urban taxi and bus drivers \
Financial disable-self claimers
Total 42,267,272 100 \ Source: IPO Website, February 2011 There are many unanswered questions on the validity of this table. Also, there are some specific contradictions between the total value of Justice Shares and individual’s Justice Shares value announced by the Provincial Investment Companies. Particularly, its consequences on the income level of the 165
individuals, on the incumbency reduction of the government, on the future of the privatized firms owned by this combination of major shareholders and how and when its control will be transferred to the private sector, all in all are in the dark side. Comparing the final figure of 42,267,272 people (Table 3) which is 9.5 folds of primary predicted of 5,000,000 illustrated in the procedure flowchart (Fig. 4), brings up some crucial questions as why is there so much gap between predicted and announced figures in the period of a year? Which one is closer to real? And how capable is the designed structure to handle a national project covering more than 42 million individuals while it has been designed for 5 million individuals?
2.3.3.3.3. Allocation Instead of Distribution
Any shareholder of the Justice Shares’ basket was induced to illegally expect receiving an amount of yearly dividend, ignoring the fact that the dividend of the first ten years is supposed to be withdrawal by government as the liquidation of the distributed shares price. That is mainly because the dividend payment once did happen at the first year of distribution, because the propagation was like a distribution of tangible wealth. Therefore, its non- execution could cause a pervasive social dissatisfaction, beyond endurance capacity of the government. On the other hand, such a dividend payment even once among a limited group of people just before the election was a trump card for the government in the election competition. Although, in the absent of regular yearly financial reports of the firms in the Justice Shares’ basket, the first paid dividend in 2009, from an unknown source, seems more like a political action rather an ordinary transaction between the government and the public. Repercussive presumption is that the bottom line of the acceptable meaning of share ownership is when the owner has the right of selling the share and voting proportional to the amount of ownership, and the right of having an access to the company’s information. However, the so called shareholders of the Justice 166
Shares have none of these rights as long as all the allocated shares have not been yet distributed within the individuals. Therefore, it seems that the idea of Justice Shares Distribution and the way that has been executed, have caused more political gain for the government rather than any for the nation.
2.3.4. Procedure and the Results of the Privatization at its Peak 2.3.4.1. Official Evaluations and Critics on the Procedure and Results
Despite of enormous and tumultuous governmental propagation on the success dimensions of privatization during 2006-2010, yet, the evidences and results were did not provide enough compatibility. The contradictories were not only announced by the IPO but also was repeatedly being declared, objected or negatively analyzed by the most reputable organizations such as Iran Chamber of Commerce and Industry and Mine, Supreme Audit Court, different committees and members of the Parliament and even Minister of Economic Affairs and Finance and The Central Bank governor, out of necessity.
The following coded examples should be helpful enough to distinguish the crucial issues and to demonstrate how comprehensive the critics are.
According to the Third report of EOPO-44, around 20% of the total shares of privatized firms have been transferred to semi-government institutions as a result of liquidating or bartering the government debts. While the management of these semi- government institutions are totally under the control of the government addition to the fact that these institutions take a bilateral advantage. They are not accountable to the Supreme Audit Court by claiming themselves as a public organization while, they also do not fallow The Commercial Law, by claiming themselves as a governmental organization. Therefore, even though the semi-government institutes ownership increase do not reduce the control of the government in the privatized firms but in fact, it also reduces the accountability of the government. The later cause is so important in financial services types of the firms especially in the case of privatized banks.
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Having in mind the IPO’s list of obstacles of privatization mentioned before (3.3.1.1), it is not unrealistic to estimate that the share of semi-government institutions in privatized companies can be much more than indicated above. The administrative board member of Parliament of Islamic Republic of Iran, Hasan Ghafoori Fard (2010) indicated that during 2005 to 2010, less than 14% of ownership in privatized companies has been transferred to the private sector and in general, the parliament is not satisfied with the implementation of privatization. Head of EPOC-44, Fouladgar (2010) stated that none of the two main targets of privatization (government’s incumbency reduction and increase of private sector involvement) emphasized by the Supreme Leader has not been fulfilled. Fouladgar (2010) also mentioned that 490 of 700 trillion Rl. of privatization value has been allocated to the Justice Shares which in fact has been transferred to the Provincial Investment Companies (under the control of government), and not to the real private sector. Addition of 130 trillion Rl. has been transferred to the semi-government organization therefore, there is left a maximum of 13.5% that can be hesitatingly assumed to be transferred to the private sector.
As a contravention of privatization plan by the government and the pressure groups, Fouladgar (2010) indicated that in order of classified firms there are about 300 small firms in the first group that should have been privatized before going to privatize the gigantic firms in the second group like Iran Telecommunication Company (ITC). Such a gigantic firm should have been privatized gradually to provide the necessary courage and security for participation of the private sector but, the government offered at once the whole share portion of ITC to the market equal to 10%-12% value of the total capital value in the TSE and 55% of the total value of privatized SOEs and also did not allow the only remained competitor to participate in the bid for security excuses and transferred or better say donated the shares to the institutions affiliated by Iranian Revolutionary Guards and the Supreme Leader Institute.
Fouladgar (2010) referred to the given report of Supreme Audit Court to the parliament, indicating that only 34% of the privatization plan during 2006-2010 has
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been achieved without any reasonable reports from government to justify this delay or fall behind.
In October 18, 2010, at the Third Act Conference general policy of Article 44 constitution, the minister of Economic Affairs and Finance stated that “I, as an executive of law cannot prevent the semi-governments institutions from participating in the privatization of SOEs through the trades in the Stock Exchange and that is the responsibility of the parliament to approve the required related laws”. Coincidentally, the preceding managing director of IPO, Kord-e Zanganeh, indicated that although 15% of the government’s share in GDP has been reduced through privatizing the SOEs, but the same rate has not been reduced for the role of government at the same SOEs. He also criticized the very little decision making authority of IPO despite of its high responsibility towards the privatization operation.
2.3.4.2. Analytical Evaluation of Procedure and Results by Private Sector
On October 17, 2010, Donyay-e Eghtesad daily newspaper published an evaluation report from the reputable influential institution of Iran Chamber of Commerce, Industries and Mines, on privatization operation based on the execution of Article 44. The responders were among the members of the chamber, the economical activists and the representatives of different productive and trade syndicates. The results indeed, were the summary confirmation of near to all the problems recognition and critics that had been announced by the economical activists or key official executives and observers about the legal potential in the content of Article 44, the way of the privatization execution, and the achievements.
The core indications of this research cover all the aspects of privatization procedure during 2006-2010, for all kinds of state owned enterprises including the state owned banks (SOBs). The following summary of the mentioned evaluation may be considered as the conservative analytical viewpoint of the private sector with providing the better privatization success condition.
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In the absence of competition, the change in ownership will never result an improvement of performance and increase of social welfare. In present condition, privatization would cause many problems rather than solving any. The competitive environment is the best economical index of the country and a very good and practical method to reach the economical market balance. Yet, it is believed that the execution of Article 44 in the process of privatization has not increased the competition level within the enterprises.
Because of too much involvement in economical activities, the government has become heedless of its observation responsibility on the correct movement toward economical growth and by competing with the private and cooperative sectors; government has put the private sector in a passive situation with the closed road of growth. There is no indication of decreasing the size of government structure or its financial cost and management role as the result of privatization.
The major target of execution of Article 44 of the constitution law was transferring the state ownership to the real private sector. Yet, the government has more cared about transferring the ownership per se rather than focusing on transferring the ownership to the private sector. Therefore, the more gain has been left for the semi-government holdings and institutions and not for the real private sector. This can be an important sign of unsuccessful operation of privatization.
Accomplishment of social justice and development of public ownership was mentioned as the most important achievement in execution of Article 44. Although, it is the general opinion and belief that the social justice will be resulted from country’s economical growth and some other think that the achievement of these two concepts of social justice and public ownership development should be applied in parallel procedure and none of them is the prerequisite of the other. But, the achievement of social justice through distribution of Justice Shares is not only refused, but is also believed that the 170
execution of Article 44 does not have the essential legal potential of this achievement per se.
The historical domination of the government over the economic structure of the country has caused a considerable resistance within the government’s body, especially within the governmental middle managers who see the privatization equal to losing their managerial credits and opportunities. Renter economy, dependency on the petrol income, ignoring the meritocracy, irregular and unmethodical enlarging of government’s structure, patriarchal behavior of government, excessive expansion of bureaucracy and not accountable position of the government, all in all, have eliminated any interest or obligation of the people within the government to cooperate with the operation of privatization in the framework of Article 44. The viewpoint and behavior of these groups have become one of the major obstacle and slowing factor of the privatization operation.
When there is not sufficient capital to inter into the market or there is not suitable profit margin in production section to attract the private sector to invest then, most of the market capital and wondering money goes to be utilized in brokerage and intermediary functions which are not in the direction of national expansion and growth. However, insufficient capital of the private sector is not the main factor for their faded presence in the market.
Privatization can cause an increase in the performance and efficiency of the privatized firm if the transferring of ownership results the transferring of management to the new owners. But the management has not shifted to the privatized enterprises because of the lack of intention or objective to do so.
In the process of privatization, the government seriously strengthened some of the semi-government institutions (including the organizations affiliated by military powers that the public do not have any transparent image of their structure and objectives), or some other political and pressure groups, through 171
providing them the exceptional credits in national projects bids and activities in the stock exchange. Such a financial reinforcement and strengthening of semi-government institutions addition to their political power, make them the most if not the only, bidder in any important privatization offer. Although there is no legal prohibition for semi-government participation in privatization bids but, nontransparent and ambiguous activity structure of these organizations, have a significant impact on the private sector to withdraw from entering into this market. Therefore, the present method of privatization seems to be more “semi-governmentalization” rather than privatization!
It seems the most important achievement of general policies of Article 44 should be the upgrading the business environment. Actually, this should be discussed in macroeconomic level of the country by including an improvement in regulations and economical infrastructures. However, there is not enough indication of stable economical policies and regulations, predictable behavior of governmental organizations, minimizing the trade costs or eliminating the various existed monopolies.
Unstable economic system increases the investment risk for private sector. An acceptable condition is when at least a clear short and mid-term economical vision be defined. The best collection of laws and regulations do not build up the investor’s confidence unless be seen to be executed in the right way. There is not enough trust among the private sector to the transparent and correct implementation of existed laws and regulation, addition to the fear of many deviations repeatedly done by the government.
In Iran, like many other countries, the privatization through stock exchange has been correctly known as the best method. But do all SOEs listed for privatization have the required condition of being offered in the stock exchange? Generally, the Stock Exchange can be the best option when there is an improved and deep capital market and equal access to the transparent data and information instead of opportunities for the pressure or renter groups to benefit of exceptional priority or advantages. 172
However, TSE’s qualifications to achieve the goals of Article 44 needs a profound review and will be discussed later.
Based on the announced figures by Central Bank the liquid cash in the market during the fiscal Iranian years [21th March in the Christian era is the beginning of the Iranian year with the difference of 621 less. e.g.: 1385(Iranian year) + 621= 2006 Christian era] of 1385-1389 (2006-2010) were:
Table4. The Trend of Liquid Cash Injection into the Market 2006-2010
Year The Christian era Injected Cash to the Market % of Change
Trillion Rl.
1385 2006 1,284 -
1386 2007 1,640 21.7
138 2008 1,901 15.9
1388 2009 2,356 3.9
1389 2010 3,000 27.3
Source: Central Bank Website, February 2011
However, despite of such a plenty of liquid cash injection with its considerable upward trend yet, most of the production units in the country have been seriously confronting with the shortage of cash. This should be the reason of deviation of the capital sources or wondering cash towards the intermediary activities rather than production. As a result, most of the bank’s sources have also been allocated to the brokerage and intermediary section addition to the fact that the banks have lost their potential of giving credits, mainly because of their accumulated delayed or bad debts. On the other hand, most of the firms do not appreciate to apply for admission in the
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stock exchange, partly because of not having the required standards, insufficient technical knowledge or lack of motivation. More than all, during 2006-2010, apart from Central Bank, the direct intervention of government in many details of banking system such as the arrangement of credit distribution and ordering the interest rate have deeply affected the appearance of such a discordant in the financial and monetary system of the country. The financial and monetary system of the country has not well provided the investors by their requested capital in the direction of privatization and there is a definite need to change the present situation of intermediary based capital market to the production based type.
2.3.5. Comparative Autopsy of the Justice Shares
The most common belief on the reason of privatization is paving the road for economical growth which reciprocally and decidedly should upgrade the social welfare. This objective is not an abstract concept and definitely is always weaved with the political and social conditions. So far in the first two chapters, the different methods of privatization through experiences in different countries has been discussed and also demonstrated how the governments confront with the failures in privatization or by taking the advantage of their own and other’s experiences how they gradually or entirely improve their policy and of course, how do they make benefits of the whole procedure and the aspects of privatization. In this chapter it has been described that in the last three decades, the peak period of privatization in Iran has been during 2006-2010, based on the duty of the government to execute the Article 44 of the Constitution law of Islamic Republic of Iran and the idea of Justice Shares became one of the basics of privatization plan. As a whole, those who are at the government’s side see the Justice Share as the outstanding part of the privatization plan but others criticize it as the major bottleneck in fulfillment of the minimum requirement of regular privatization. Therefore, it demands specific comparative deepening in the related literatures and the conditions of Iran and try to find out the routs and the consequences of the similar situations compare to the case of Iran.
Since 2007, debates and open critics gradually started on the weakness or neglected points in the content of Article 44 and reached to that level to be claimed that the Article 44, because of 174
its many deficiencies should be considered more as a plan rather than a law. On the other hand, there also appeared a serious and continuous critiques and objections to the privatization execution with many discrimination indications and considerable delay occurred by the government in privatization action plan. Addition to all, there is a challenging argument in different level of experts, activists, observers and executers about the impact of Justice Share Distribution on the results of privatization in Iran as it can form up to the limit of 50% of the total privatization plan. The government as the proposer and executer of the idea claims that it is the most justly method of distribution of national wealth especially when the distribution starts from the lowest income level and it faster eliminates the cast different. The government also believes that this kind of privatization will educate the culture and knowledge of privet ownership to the majority of the population who would never have confronted with the whole subject in any other way. The government also hopes that the distribution of the Justice Shares will also accelerate the operation of the privatization with the less cost. But, these claims and hopes do not mitigate the critiques, apprehensions and doubts about the government’s policy and targeting on these areas. The followings are some of those doubtful or objected discussions about the whole concept of the Justice Shares as the trump card of the government in the action plan of the privatization in Iran.
The real benefit of the people is when the national wealth is being optimized and faces added value and generally it would be through the capital or wealth formation rather than shattering it. On the other hand, Tabibian et al. (2010) well explained that the modern economic concept deals with optimizing the national wealth when it is the result of humans work and interchange of their outputs. Meanwhile, the more consolidated and well defined property right will increase the amount of individual efforts and extend their mutual trade. In fact, it is the property right that increases the individual responsibility in one side and expands the extent of trades and individual capability in the other side then, both sides together optimize the national wealth. Therefore, by distribution of Justice Shares, the new owners (40%-50% ownership of privatized SOEs), should be capable of optimizing or adding the value of this wealth. However, this does not seem a very realistic expectation or practical achievement because:
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It is a general and undeniable rule that the lowest income deciles cannot have any front position or considerable contribution to the areas related to the national value added or economical growth. Their indirect contribution in latterly levels is possible only by involving them in the area of production (industry, agriculture) and services or providing them a sufficient supports and opportunities to initiate some small and local business. Obviously the concept of distribution of Justice Shares does not overlap with none of these actions. Instead, these recipient groups of the Justice share will only find the chance of selling their shares to the market’s brokers or Provincial Investment Companies, certainly in a buyer market situation. The combination of 42,267,272 owners of Justice Shares (Table 3) shows that the most knowledgeable people may be found within the 34% of the total identified future owners including: government’s employees, government retired employees, municipalities’ employees and the journalists. The rest, such as unemployed tribe and rural population, low income carpet weavers, theological students or servants of mosques and shrines, for a long period of future, cannot be considered as the activists either in stock exchange market nor in any other areas related to the economical growth or optimization of the national wealth. Till ten years after the distribution of the Justice Shares, all the shareholder’s authorities of the Justice Shares would be considered as collateral in Provincial Investment Companies who are also managing the Justice Shares portfolio. While, there is no reliable information about which share in what amount is in this portfolio. However, with such a deep multilateral lack of information, weak capability and participation occasion of the Justice Shares future owners in any related areas, there is no evidence of any plan to educate the Justice Shares’ owners to be active in the stock market. Transferring the ownership without transferring the management control will indeed neutralize the main functional potential of privatization. However, the idea and the structure of Justice Share do not have any homogeneity with the concept of control/management transfer. In fact, because of; the huge number of individual owner of Justice Share; their vast scattering in all over the country and; their poor related
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knowledge and capabilities, most probably if not certainly, they would not have the required management perception and education.
Tabibian et al. (2009) pointed the discussion of “What is seen and what is not seen “by Frederic Bastiat who reasons how the failed interventional policies of a government in the area of economy can be continued and be justified in the public view even if it is accompanied with the critics of the economists. In fact, this happens when the public can only see the acceptable signs of what has happened without recognizing the negatives and losses behind. This can be generalized to all the economical aspects of social life, especially to the interventions of the government in the economical activities. When the majority of the people are not familiar with the economical logic then, they will only trust “what is seen” and willy-nilly they either are not able to understand the fact behind of “what is not seen” or they recognize “what is not seen” but cannot estimate its cost value. Therefore, in such a situation, in selection between tangible and ambiguous results, the unseen reality will be sacrificed by the public to the benefit of the government. The above discussion can be applied to the case of Justice Share as well. Although, the government of Iran did think or reasoned about less cost of privatization through implementing the Justice Shares distribution but, it has not yet discussed the opportunity profits and the actual losses of this policy. This is the area that nobody feels free to discuss the results and naturally there has not been provided any reliable and scientific based analysis, except a few afforded by blacklisted Iranian economists.
In summary, it seems that the distribution of Justice Shares can very hardly optimize the national wealth, have the consistent application along with the capital formation in national wealth, educate the low income level people with the different aspects of private sector or practice the main functions of privatization such as transferring the management control. Instead, it seems as a faster getting rid of the privatization operation rather than accelerating the meaningful aspects of privatization. Also, there is no national level study indicating the less cost or any other positives and negatives of Justice Shares Distribution, while it cause: no capital injection to the privatized SOEs, no revenue receipt by government, no change in governmental management of privatized SOEs and finally, no aid to release the country’s
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economy from dependency on the petrol income that should have been done through promoting the added value activities.
Another important debate on the subject of Justice Shares Distribution is about its similarity with mass privatization or Voucher method. This argue is important when it can be proved that despite of the innovative naming of the method as “Justice Shares Distribution” , it has been repeatedly experienced unsuccessful in different countries especially in the post communist countries.
To have a better foreseen of more future advantages and disadvantages of Justice Shares distribution, it is necessary to perform a comparison of these two methods of mass privatization or voucher sale and Justice Share distribution, different in name but may be the same in nature.
Mass privatization program were first undertaken in 1992, in Czechoslovakia, Romania, and Russia. Estonia and Lithuania joined the ranks in 1993, with the other transition countries, especially those in the former Soviet Union, developing programs more recently. By 1996, most transition economies had either introduced this privatization program or were considering doing so.
Estrin and Stone (2001) by studying the aforementioned countries, named a few major characteristics of mass privatization which are:
To rapidly privatize a large number of firms in circumstances where only a few potential buyers had sufficient funds to purchase company shares, where capital markets were so underdeveloped that these individuals could not expect to borrow such funds. Insider control derived from the discount offered to employees, in the context of bearer vouchers and a continuous privatization process. It may rely on non tradable vouchers with fewer discounts to insiders during the mass privatization auction process.
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Where the valuation of companies was extremely difficult mass privatization injects sufficient liquidity into an economic system to enable the transfer of state ownership to private individuals, and it limits the inflationary impact by ensuring that the credits cannot be used directly to finance consumption.
Thieme (1993) the chief privatization advisor of Poland, indicated that mass privatization is a solution for companies that are good but not good enough to find direct investors or buyers even in the near future. Then, he strongly relied on the fact that, capital markets will be the ones to value the companies for privatization without hiring any consultants or experts to do the valuations by believing that this kind of process will reduce the cost of privatization.
2.3.5.1. Comparative Views
Bearing in mind the main characteristics of mass privatization, there will be comparative view to find out how far the major characteristics of Justice Share distribution and mass privatization could overlap?
Back to the case of Iran, because of four main reasons, the same conditions of poor potential exist for local investor’s participation in the privatization’s bids. Firstly, the middle and lower classes are haggling with the high inflation rate. Secondly, because, of high unemployment rate in the country (In 2010, UN reports the trend of inflation rate in Iran from 8.3 to 33.2 during 2000-2008). Thirdly, there is no investment security for local investors to take a risk of participating in large scale privatization neither at the bidding stage nor at the operation stage without fear of government’s unbalanced competition or intervention. Finally, the foreign investors, despite of Iranian government’s asserting, are “each and every” absent as a whole (Fig.5). The absent report of the foreign investors is also evident in yearly reports of the TSE for the last 5 years.
Two major reasons can express how the objective of rapidity could be another definite overlapped similarity. First, the government was very behind of the timing and should have seized the last opportunities to overcome at least partially in the
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subject of privatization. Secondly, the announcement and starting the distribution of Justice Shares was a dreamy occasion for the government to upgrade its position for the presidential election in 2009. Therefore, instead of liquidating the price of distributed shares by allocating the annual share revenues, the government announce to pay cash profit to the new owners at the first year without being able to show this amount of profit in the annual financial reports of the privatized firms and without revealing illegal sources of this payment and with violating the law of ten years price installment of Justice Shares.
The share pricing through exploring the price in TSE was the same as did practiced in the pre-communist countries. Additionally, there also needs to consider the correlation of the general goals and objectives with the impacts and the consequences of the mass privatization for any justification in the case of Iran. As the consequences of mass privatization, many humanitarian issues such as Mortality Crises have been brought to the consideration as the negative effect of mass privatization. King et al. (2009) indicated that one million working age men died between 1989-2002 from the “Economic Shock” resulted by mass privatization in Russia and some believe that even if mass privatization policies are economic beneficial, the human catastrophe would not be worth the price (at least according to most people’s value systems). Although, it is not expected to witness the same human catastrophe happens in Iran but the human calamity is rapidly shaping in different form by negating the productive potential and motivation of the farmer and labor population and altering them to the mass of the people waiting be occasionally paid by the government in different charity types such as Justice Shares (mass privatization).
Miller (2006) concluded that dilution is associated with positive performance, suggesting that more concentrated ownership has had some benefits. Even after a number of years have passed, privatized firms through mass privatization in East and Central Europe have performed less well than firms privatized by other methods.
Grosfeld and Hashi (2003) argued that the expectations and early findings of positive effects of mass privatization on corporate performance were premature. The 180
performance effects of mass privatization on the whole, surprisingly limited and do not generate performance that is different from that of firms with state ownership. This lack of difference in performance is provocative because it has generally been assumed that various private owners would perform better than the state and the extent of inefficiency and looting of firms associated with various types of private ownership has been underestimated.
Cordet Dupouy (2009) indicated that at the time of mass privatization in the pre- communist countries, there was no objective of poverty alleviation, of popular concern, of anything, except that, the main objective of privatization policy officials was speed. And in many discussions that were held about the dual incompatible objective: speed versus budget revenues, speed was always the selected path.
Simoneti et al. (2002) resulted that mass privatization is typically considered successful if secondary transactions lead to improved ownership, in particular, with emergence of strategic investors. If this approach is correct, positive effects of mass privatization are thus not shown only by companies remaining in control of initial owners but mostly by the companies that have already gone through secondary privatization. Accordingly, the success of secondary sales is to be evaluated by how successfully companies perform after the sale to new owners.
Apart from the matter of speed as a common objective for the policy makers both in Iran and pre-communist countries, poverty alleviation is one of the differed areas that needs to be considered. Cordet Dupouy (2009) emphasized that at the time of selecting the mass privatization method in East and Central European countries, the poverty alleviation was neither one of the objectives nor the result. However, one of the highlighted announcements of Iranian government was the alleviation of poverty directly through the implementation of Justice Shares Distribution. Such an objective that had not been resulted before from the similar experiences indeed, leaves a doubt that the idea of “Justice Shares Distribution” was whether a policy made by demagogic politicians or a right choice at the wrong time.
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2.3.5.2. Analytical Views
Since 2007, debates and open critics gradually started in Iran on the weakness or neglected points in the content of Article 44 and reached to that level that some experts claimed that the Article 44, because of its many deficiencies should be considered more as a plan rather than a law. Some others believe that the main problem is included in the very wide gap of views and targets between those who had compiled the content of Article 44 before and those who are implementing it now. On the other hand, there also appeared a serious and continuous critiques and objections to the way of the privatization with many discrimination indications and considerable delay occurred by the government in the operation of privatization action plan. Addition to all, there is a challenging argument in different level of experts, capital market activists, observers and executers about the impact of Justice Share Distribution on the general results of privatization in Iran as it forms 40% to 50% of the total privatization plan. The government as the proposer and executer of the idea claims that it is the most justly method to distribute the national wealth especially when the distribution starts from the lowest income deciles and it also faster eliminates the cast different. The government also believes that this kind of privatization will educate the culture and knowledge of privet ownership to the majority of the population who would never have a chance of dealing with this subject in any other way. The government also hopes that the distribution of the Justice Shares will also accelerate the privatization process with the less cost. All the related slogans of Justice Shares are mainly focused on increasing the householders’ wealth without any specific refer to other important reasons and results of privatization like coverage of financial deficit or strengthening the private sector. On the other hand, there are many critiques, apprehensions and doubts about the government`s policy and targeting. The followings are some of those doubtful or objective discussions about the whole concept of the Justice Shares Distribution in the action plan of the privatization in Iran.
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The real benefit of the people is when the national wealth is being optimized and leads to the added value mainly through the capital information rather than shattering the national wealth. On the other hand, Tabibian et al. (2010) well explained that the modern economic concept deals with optimizing the national wealth when it is the result of humans work and interchange of their outputs. Meanwhile, the more consolidated and well defined property right will increase the amount of individual efforts and extend their mutual trade. In fact, it is the property right that increases the individual responsibility in one side and expands the extent of trades and individual capability in the other side then, both sides together optimize the national wealth. Therefore, by distribution of Justice Shares, the new owners (40%-50% of ownership of privatized SOEs), should first learn and earn the property right and then be capable of optimizing this donated wealth through the Justice Shares. However, this does not seem a very realistic expectation or practical achievement because:
As a general rule, the lowest income level population can never have any front position or considerable contribution to the national value added or economical growth. Their indirect contribution in latterly income levels is possible only by involving them in the area of industrial or agricultural production and services or being supported to initiate some small and local business. Obviously, the concept of distribution of Justice Shares does not overlap with none of these facts.
the combination of 42,267,272 owners of Justice Shares (table 3), shows that their most knowledgeable people may be found within the 34% (in case of correct and not duplicated data) of the total identified population including: government`s employees, government retired employees, municipalities employees and the journalists. The rest, for a long period of future, cannot be considered as the activists neither in stock exchange market nor in any other areas related to the economical growth or optimization of the national wealth especially when the government too, has not yet presented any plan for educating them the culture and knowledge of private sector`s behavior.
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Previously, the similarity of the idea of Justice Shares Distribution with mass privatization or voucher method was indicated through comparative autopsy of both methods (3.5). This argument is important when the two methods are similar then, their result cannot be completely different.
It was repeatedly indicated through many studies about privatization that transferring the ownership without transferring the control will indeed neutralize the main functional potential of privatization. Even though, in a way the Justice Shares have been treated (Fig. 4) it does not show any homogeneity with the condition of management transferring. However, it has provided many benefits for the government not necessarily the same for the people. Claiming the allocation of 50% shares of privatized firms to the Justice Shares has enabled the government:
To announce any firm be privatized only by 6% share offering in TSE (because adding it to the 40% allocated Justice Shares plus 5% Preferred Shares results 51% privatized shares).
To retain the control of the privatized firms without any accountability to the public due to their non-governmental ownership.
To take the legal advantages of private sector characteristics of privatized firms when it confronts problems to deal through the governmental channels and identities. Especially in the matter of privatized banks to withdraw money for off-budget expenses.
2.3.6. Government the Winner, Private Sector the Looser
Benchmarking and looking for the best practice is a fundamental way to make benefits of other`s experiences and specially seems essential in choosing the best possible method of privatization. Meanwhile, there is no obligation for any government to implement a complete privatization scheme, experienced by other countries, mainly because the privatization is
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originally a political decision that inevitably may differ from country to country. Generally, the policy makers choose one model to localize it or few models to combine them. In return, the formation of such a political decision depends on both country and market conditions. In other hand, privatization has a dual economical sit. It is partly an indication of dominated political economy system, while it is also an important influential element for the performance of economical system.
As described before (in 3.2.2.) about the pillars of privatization in Iran, the whole plan of privatization was supposed to be on the base of execution policy of the Article 44 of the Constitution Law with the main attention to prevent enlarging the government size, reducing its incumbency, reinforcing the private sector and the expansion of its involvement in economic activities. Naturally, such a condition strongly requires the fundamental social institutions as the most outstanding bodies for the task of observation of the whole procedure. Because, in a country like Iran there exist a high potential of capability for these kind of institutions, as an scout observers, to control and correct the processing procedure and provide the suitable feedbacks to the public and the executers at the right points. Through all, only the reports of EPOC-44 on investigation and evaluation about the execution procedure and results of privatization are considered as the official documents to rely and none else.
EPOC-44 in its third report announced the results and appeared problems of privatization during 2005-2010. The major findings in this report are:
Since 2005, around 300 companies with the total value of 700 trillion Rl. (rounded figure of 699,542 billion Rl.) have been privatized. This figure is 80% of companies value and the remained 20% is the retained government`s share. The breakdown of ceding (excluding 20% government`s shares) is; 49% allocated Justice Shares, 17.5% Semi-government`s Bartered Shares (shares transfer to semi-government institutes to liquidate the government`s debt to these institutes), 13.5% private sector and the remaining 20% has been bought by different semi-government institutes. In other words all the shares except the 13.5% for the private sector are under the control of the government.
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Eventually, the government should see itself as the winner because its incumbency in economic activities has not been decreased and it has retained its dominated approach in the privatized institutes operation. Establishment of the idea of Justice Shares Distribution did work as a “patronage machine” for the government. An increasing trend of semi-governments` yearly budget is a good indication to show their intention to continue their enlargement as a part of the government`s structure. The semi-government institutes are a two-headed creature that government can benefit their advantages as private or governmental sector. Before privatization, government was obliged to be accountable on behalf of governmental companies while, by claiming those companies as the privatized once, it feels no obligation to be accountable on behalf of them anymore.
Definitely, the private sector see itself as the looser of privatization game because the strong government`s monopoly and more rent provided for semi-government institute have been exiled the private sector at the margin area of economic activities addition to strengthening the governmental concealed economic environment instead of market and economic liberalization.
2.3.7. Concluding Remarks
1- All the economical models during 1960 to 1979 was dictated in Iran by USA or blindly copied from American modules by claiming of localizing them (Shahriary-Rad, 2003). 2- Huge overdrafts, fictitious promissory notes and excessive borrowing without the provision of proper guarantees, looted money and much capital transferring abroad bankrupted most of the banks (Rahnema and Behdad, 1996). And 938 private companies including the banks were nationalized during the first years after revolution (Motavasseli, 1995). 3- The first round of privatization (1980-1988) was implemented under the exaggerated influence of pressure groups (Shahriary-Rad, 2003). 4- The second round of privatization (1989-1994) was coincided with setting new direction toward deregulation, privatization, free enterprise, and a return to the mechanisms of the free market that ended with privatization of 150 industrial companies and not so much success (Shahriary-Rad, 2003). 186
5- The third and the main round of privatization started from 2005 with well compromising coordination between the government executers and the corresponded pressure groups to the regime, with hidden target of replacement of the ownership between themselves and not losing the control. 6- The trump card of privatization plan was the Justice Shares Distribution with the announced objective of increasing the lower income householders` wealth through distribution of national wealth and in fact, provided a miraculously number of government`s patron. 7- The ceding price for privatizing the SOEs was explored by first offering of 5%-6% shares of each firm at the Stock Market. 8- Apart from 20% retained shares for government, ceding the rest done as; 40%-50% allocation for Justice Shares, 5% preferred shares (selling to the staff), different amount of ceding to the semi-government institutes as bartering the government`s debts and share offering in stock market mostly as a block by which the total share of semi-government institutes in total value of privatization exceeds 17% (excluding the bartered portion). 9- The optimistic maximum participation of private sector is 14% of total privatization for 2005-2011 and the rest remained under the government control. 10- Around 80% of selling value was based on debt bartering or long period installment without any cash gain for the government. 11- So far, the government is the winner of privatization procedure because of achieving its desired goals including; claiming to meet the execution of privatization schedule even though with considerable delay and violating the laws and regulations, retaining the control of privatized firms, strengthening the semi-government institutes at the cost of weakening the private sector, decrease its accountability without decrease its incumbency, create a huge number of low income patrons. 12- As expected, the private sector was the loser of privatization game because of confronting; more monopoly imposed by government and semi-government institutes, decrease its involvement in economic activities, disappointing future related to economy and market liberalization.
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2.4. Chapter Four: A WORLDWIDE APPROACH TO THE BANK PRIVATIZATION: DEBATES AND ISSUES 2.4.1. Chapter Summery
This chapter includes a brief overview on bank privatization’s approach and its related issues especially at the superiority discussion of private and privatized banks to the state-owned banks. Most importantly, it focuses on the political and economic dual nature of bank privatization and the effect of ownership combination in privatized banks which have a main role in bank privatization in Iran.
2.4.2. An Overview of General Thoughts and Findings about Bank Privatization 2.4.2.1. General Approach to the Bank Privatization
A new wave of bank privatizations in the past two decades has significantly changed the ownership structure of banking systems around the world. The idea of bank privatization was partly driven by the identified poor performance of state-owned banks (SOBs) as well as by the disadvantages experienced from the impact of government ownership of banks on financial and economic development next to the impact of privatizations on bank performance.
Government ownership of banks has been consistently declining since 1970. This pattern so much accelerated for 1980-2000 that nothing considerable left for the recent past decade. La Porta, Lopez-de-Silanes, Shleifer (2002) documented that government ownership of banks was still prevalent around the world in 1995. Since then, the average government ownership of banks has declined significantly, dropping to 21% as of 2005. Bank privatizations in the former socialist countries, including Romania, Bulgaria, Hungary, and Poland, have led the way in the latest wave of bank privatizations around the world. While privatizations in these countries have led to an increase in foreign ownership of banks, other countries such as Belgium, Colombia, France, Norway, and Taiwan have experienced significant increases in domestic block-holder ownership of banks.
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Although many governments have privatized state owned banks, but some have resisted, some have renationalized previously privatized banks, some have blithely wandered on and off the privatization path and many have privatized using approaches that failed to yield the full gains from privatization. It is important to understand which factors are effective on the decision of policy makers and how affects privatization decisions?
To examine how political, institutional, and economic factors are related to a country’s decision to privatize state-owned banks, Boehmer, Netter, Nash (2005) used a comprehensive panel of 101 countries from 1982 to 2000, and found that the determinants of this decision differ markedly between OECD and non-OECD nations. Political factors significantly affect the likelihood of bank privatization only in developing countries. Specifically, in non-OECD countries, a bank privatization is more likely the more accountable the government is to its people. All other political variables in their study do not affect the bank privatization decision in developed countries. In contrast, economic factors (such as the quality of the nation’s banking sector) are significant determinants of bank privatization in both OECD and non- OECD nations. They address a country’s decision to privatize state-owned banks. Because state-owned banks often provide governments with important policy tools, privatization of the banking sector is often regarded as a sensitive issue.
Boehmer et al. (2005) found that in about half of the panel’s countries, the state has privatized at least one bank. It is valued to isolate why some countries have privatized banks and others have not. They pinpointed that each country’s first privatization, which they deem the start of a privatization program. Because, when it privatized its first bank, a natural question is how long this process takes. This is important, because political considerations make the general decision to begin privatizing state- owned firms distinctly different from the decision to privatize a bank. Generally, the decision whether and when to privatize a SOB has political implications and the government needs to consider the benefits and costs of bank privatization even more than any other privatization case. Benefits of bank privatization like any other areas
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include sale revenues, increased efficiency of the bank, and development of the capital market. But the costs have more fine distinction specifically because of the loss of the government’s ability to use the bank for political purposes. These purposes become much important for the governments like Iran whose main political approach is patron providing. More often, such a target would generally justify many illegal behaviors of the government. Therefore, addition to the patronage and job creation, another much important cost of bank privatization would be the disability to channel money through the bank for political purposes (such as withdrawing money for off- budget expenses and promises and providing favorable loans to the political supporters).
Boehmer et al. (2005) also concluded that, there can be identified several variables for expecting the politics to operate differently. First, the local politicians who typically determine banks’ lending and employment policies are not the same as the national politicians who decide on budget and tax issues, and usually make the privatization decisions. Thus, the benefits and costs of SOB privatization do not fall on the same individuals. To the extent that benefits accruing to local politicians are associated with costs imposed on national politicians (i.e., the economy), the likelihood of SOB privatization (assuming privatization decisions are made by national politicians) will be greater.
Crucial reforms in the banking and financial sectors are necessary to provide a financial structure that supports a market economy, particularly the private and enterprise sector, leading to economic growth. A large theoretical and empirical literature, summarized in Shirley and Walsh (2000) examines government ownership and privatization of SOEs and indicated that much of the rationale for government ownership comes from the theoretical view that government is composed of well or even perfectly informed agents whose principal goal is to maximize social welfare. Under this assumption, government ownership reduces the cost of government intervention to correct market failures including natural monopolies, reduce income inequality, and undertake a host of other social goals. Seen in this light state
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ownership of banks could be justified as an efficient way to raise capital for projects with high social returns but low private returns or to provide finance to poorer borrowers that would be neglected by less well informed or motivated private bankers.
Sapienza (2003) studied the effects of government ownership on bank lending behavior and stated that borrowers from state-owned banks pay an average of 44 basis points less than do borrowers from private banks. He also showed that the voting pattern of the region where the loan is booked and the party of the state bank's CEO significantly influence the price of loans.
2.4.2.2. Issues Related to the Bank Privatization
Fiscal Pressure: A common objective of privatizations is to raise revenue for the government. In a study specifically to the bank privatizations, Verbrugge et al. (1999) alluded that governments appear to re-structure SOB before privatization in order to maximize the proceeds from the sale. While Clarke and Cull (2002) found little evidence that in some cases like Argentina, fiscal needs affected the likelihood of SOB privatization. Further, since a government’s need for revenue is especially pronounced during periods of fiscal crisis, the probability of SOB privatization is expected to increase as a country’s deficit widens. This factor should influence the privatization decision in both OECD and non-OECD nations. Clarke and Cull (2002) referred to the annual budget deficit for each country from the International Financial Statistics of the IMF that shows no differences between non-OECD countries that privatized a bank and those that did not. However, for OECD countries, the median deficit is larger in absolute terms for countries that privatized a SOB. This suggests fiscal pressure is related to the privatization decision only in OECD.
Quality of Banking Sector: Caprio and Klingebiel (1996) and Verbrugge et al. (1999) showed that many SOBs exhibit poor financial performance, possibly because the banks were used to make politically-motivated loans. If governments use privatization to improve financial performance, SOB privatization should be likely in 191
countries with lower quality banking sectors. Consistent with this hypothesis, Clarke and Cull (2002) found strong evidence that poorly performing SOBs are more frequently privatized and indicated that less efficient banks typically make more loans to public entities. Further, they find that a larger relative amount of lending to the public sector increases the probability that a SOB would be privatized. Therefore, if a higher proportion of loans to public entities are a characteristic of weaker performance, naturally there should be a positive relation between lending to government and the probability of SOB privatization. In a political sense, this variable captures the use of banks by politicians to engage in off-budget targeted spending to their clients. This proxy for bank quality is more likely to be a significant determinant of privatization in non-OECD countries than OECD countries. Opposite to the non-OECD countries, there is more variation in the checks and balances that control politicians’ actions in OECD countries and there may be a very rare opportunity for local politicians to use banks towards their personal political benefits. Accordingly, there is more benefit to the national politicians to privatize banks where off-budget targeted spending, and thus the economic cost, is large. The second proxy for bank quality focuses on banks’ equity capital. Lower equity-capital should indicate a weaker banking sector. One approximate measure that is consistently available is the ratio of the difference between total bank assets and total bank deposits to total bank assets. Boehmer et al. (2004) in their empirical research found that there is a negative relation between this bank equity-capital ratio and the likelihood of SOB privatization. This variable also captures political aspects of SOBs, because lower capital equity implies that using bank lending for political gains is less feasible. Since this ratio varies more in non-OECD countries, it is expected to be more strongly related to the privatization decision in the non-OECD sample. Privatization is more likely if banks extend more loans to government entities. The ratio of loans to government is higher for countries that privatized a bank than those that did not. This is one of the few variables that has a similar effect on SOB privatization in both OECD and non-OECD countries.
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Banking Crises: Clarke and Cull (1998, 2000, 2002) and World Bank (1995) noted that while governments facing an economic crisis, such as systemic bank failures, are more likely to privatize. A systemic banking crisis occurs when much or all of a nation’s bank capital is exhausted. Clarke and Cull (2002), Barth, Caprio, and Levine (2000) and Caprio and Klingebiel (1996) all documented banking crises around the world during the same period. Bank insolvencies have been especially costly in the developing countries and have substantially contributed to government deficits. Therefore, to lessen the fiscal burden and reduce the probability of future bank failures, governments may be more likely to privatize SOBs following a systemic banking crisis, and it is expected this effect to be stronger in developing countries. Barth et al. (2000) and Caprio and Klingebiel (1996) indicated that a banking crisis increases the probability of a SOB privatization in non-OECD countries.
Capital Market Development: The governments use privatizations to spur the growth of fledgling financial markets (Megginson et al., 2004) and SOB privatizations have created hundreds of thousands of new shareholders in countries around the world (Verbrugge et al., 1999). Privatization through public share offering can jumpstart the stock-market development and trigger gains in economic growth and efficiency. For example, the privatization of large banks through share offerings should enhance the liquidity of the nation’s equity market. With more shareholders, the market becomes more active and liquid. This encourages more firms to go public and the capital market experiences rapid growth (Perotti and Oijen, 2001).
Demirguc-Kunt and Huizinga (2000) and Barth et al. (2000) stated that the benefits from SOB privatization should be most significant in the equity markets of developing nations where, typically have less sophisticated capital markets and more state-owned banks. Therefore, if governments use privatizations to encourage stock market development, SOB privatizations is expected to be more likely in nations with less developed equity markets. On the other hand a study by Netter et al. (2005) revealed a positive relation between equity market development and the probability of SOB privatization in non-OECD countries. This is inconsistent with the hypothesis
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that governments use SOB privatizations to stimulate the growth of domestic stock markets. However, this result is consistent with Verbrugge et al. (1999) who found that governments often require a well-developed equity market in order to execute a larger bank share-issue privatization (SIP). Furthermore, while SOB privatizations can create many new shareholders, other types of privatizations typically have an even larger impact on stock market development. Megginson et al. (2004) showed that telecom privatizations are the largest offerings in a majority of countries and create the most new shareholders. Therefore, governments seeking to develop equity markets may do so through privatization of telecoms or other state-owned enterprises when they are perhaps larger or more well-known than the nation’s SOBs. In addition, the results do not capture the more subtle difference between using SIP and asset sale privatizations to develop capital markets. This may be important, because only SIP privatizations have a direct effect on the development of capital markets.
Size of the Private Banking Sector: Similar to using privatization to bolster the capital market, a government may also use SOB privatization to enhance the country’s private banking sector. Beck et al. (2000) reported that SOBs are more dominant in developing countries. Netter et al. (2005) also pointed that SOBs are notorious for making politically-motivated loans, which are often economically unsound. As a result, governments may choose to privatize SOBs to improve access to private funding and reduce the state’s involvement in capital allocation. Therefore, governments of countries with smaller private banking sectors are expected to be more likely to privatize SOBs (see: Demirguc-Kunt and Huizinga, 2000 for two proxies of measuring the size of a nation’s private banking sector).
Gender Discussion: It is not a strange view in low-income countries in general and some of the Eastern African developing countries in particular to believe that, it is the women who have special need of access to the bank’s services. Hlupekile Longwe (2003) gave attention to whether the advantages of SOB’s privatization affect women and men equally. More specifically, are there better services available from a SOB more to the advantage of women, rather than men? Are women's interests served
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more than men's? Do SOBs enable women to overcome discrimination against them in their economic life?
Accepting that SOB is likely to provide better services to the ordinary and low- income citizen, leads to assume that these services are more to the advantage of women, rather than men. To this is simply because men are amongst the more privileged in society. Nevertheless, yet it is totally depended on the cultural structure of the society. In some examples like Iran, the majority of women who goes for bank’s facility are among the guard less women and not because of being traditionally active in small business and what so ever. Generally, the SOB is better geared in its policy and provisions to reach customers who are more rural, poorer, and engaged in small-scale farming or small-scale business. Given the privileges and domination of men in economic matters in the patriarchal societies of the developing world, it is women who are the majority amongst the poor, amongst the small-scale farmers, and amongst the small traders and business people. The SOB is therefore of special benefit to women, who will not be reached by a more profit-oriented bank. If the SOB is privatized, and then takes a hard-nosed approach to profitability, naturally the proportion of women amongst bank account holders will fall.
For a woman, a bank is not merely a safe place for money; it is also a refuge which enables a woman to maintain control of her money, and of her business. A bank provides an essential mechanism that enables a woman to exert economic independence and empowerment. A banking system, if it has any interest in women's economic advancement, should go out of its way to attract women as customers.
Normally, the SOBs are expected to work entirely egalitarian without any gender discrimination in their services. But multinational (and foreign) banks especially in low-income developing countries tend to do exactly the opposite, and seem to be more concerned with 'fitting in' with the local patriarchal culture. Barclays Bank discrimination in Zambia is an example Hlupekile Longwe (2003) put forward and demonstrated that any married women in opening a current account is asked on the application form to produce the details and signature of her husband. By implication, 195
the husband supervises the account, and is in a position deny a current account to his wife. But the gender discrimination is not limited to multinational banks. Even in some petrified conditions like Iran it becomes a credit for the state bank’s manager like Mellat Bank, when he vulgarly announces opening of a feminine branch with all female staff to sexual partitioning the services!
2.4.2.3. Superiority of Private Owned and Privatized Banks to the State-Owned Banks
The empirical studies about privatization of SOEs produced during the last fifteen years, has generated a conclusive answer regarding the relative efficiency of state versus private ownership? Near to all the findings indicated that private ownership is superior to state ownership except under very special circumstances (Dewenter and Malatesta 2000, and Djankov and Murrell 2002). Addition to this general conclusion, even the particular studies about SOBs privatization also agree on the same superiority also reminding some exceptions.
A good example of such an exception can be the study by Bhattachatya, Lovell, Sahay (1997) that examined the relative efficiency of 70 state-foreign and private- owned banks in India and found that during 1986-1991, publicly-owned banks were the most efficient and privately-owned banks the least efficient at delivering financial services to customers. However, they also found that foreign-owned banks increased market share significantly during this period, primarily at the expense of state banks.
Berger, Clarke, Cull, Klapper, Udell (2003) used data from Argentina in the 1990s to analyze the static selection and dynamic effects of domestic, foreign, and state ownership on bank performance. They found that OBs have poor long-term performance and that those banks undergoing privatization have poor performance beforehand, and dramatically improve their performance after privatization. Micco et al. (2007) examined the relationship between bank ownership and bank performance for banks in 119 countries. They found that in developing countries, SOBs have lower profitability, higher costs, higher employment ratios, and poorer asset quality 196
than their domestic counterparts. With the exception of state-owned banks having higher costs than their domestic counterparts, they do not find evidence of significant differences between state and domestic private banks’ performance in industrial countries. More recently, Mian (2003) explored the differences between foreign, private domestic, and government banks in 100 emerging markets, and found that SOBs perform uniformly poorly, and can only survive due to government support.
The problems associated with government ownership of banks extend beyond the negative impact on bank performance. Barth et al. (2004) documented that government ownership of banks inhibits financial development and economic growth. By pursuing political, rather than socially and economically optimal objectives, a large presence of government banks can hamper economic efficiency. La Porta, Lopez de-Silanes and Shliefer (2002) assembled data which established four findings. First, government ownership of banks is large and pervasive around the world. Second, such ownership is particularly significant in countries with low levels of per capita income, underdeveloped financial systems, interventionist and inefficient governments, and poor protection of property rights. Third, government ownership of banks is associated with slower subsequent financial development. Finally, government ownership of banks is associated with lower subsequent growth of per capita income, and in particular with lower growth of productivity rather than slower factor accumulation.
During the first two decades of bank privatization especially when it was accelerated in transition countries, the debates were about both for and against bank privatization. But in the last decade, this duality has been more or less fainted and been replaced by discussion about pre-requisite and pre-conditions of bank privatization addition to study its social-political and economical impacts. Back to the first two decades of privatization, there are some theories offer at least three reasons in supporting State- Owned banks. First, state-owned banks will serve markets that are underserved because of imperfect information or incomplete contracts (Greenwald and Stiglitz, 1986). Second, private banks will tend to become too concentrated, limiting access to
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credit to fewer borrowers (Caprio and Honohan, 2008). Third, private banks will take bigger risks, creating more crises (Honohan, 2005). There is no significant link between state ownership and access to credit in 3000 firms in over 30 countries nor is there evidence that state banks serve underserved markets (Clarke et al., 2001). State owned banks are not associated with stability; they may be a cause of instability (Beck, Demirguc-Kunt, Levine, 2003). SOBs are associated with the same risk of systemic banking crisis as private banks (Barth, Caprio, Levine, 2000) and increase the risk of bank crisis and instability (La Porta, Lopez-de-Silanes, Shleifer, 2002). Government ownership of banks is negatively correlated with favorable banking outcomes and positively linked with corruption. However, government ownership does not retain an independent, robust association with bank development, efficiency or stability when other features of the regulatory and supervisory environment are controlled for (Barth, Caprio, Levine, 2004).
Cornette, Guo, Khaksari, Tehranian (2003) examined performance differences between privately-owned and state-owned banks in sixteen Far East countries from 1989 through 1998. They found that state-owned banks are significantly less profitable than privately owned banks due to state banks' lower capital ratios, greater credit risk, lower liquidity and lower management efficiency. While the performance of all banks deteriorated significantly at the beginning of the Asian economic crisis in 1997 and 1998, state banks' performance deteriorated more than private banks where the government involvement in the banking system was the greatest.
Weintraub and Nakane (2005) examined the privatization experience of roughly 250 Brazilian banks over the period 1990-2001. They stated that bank size and ownership are important determinants of productivity. In particular, found that state-owned banks are significantly less productive than private banks and that privatization significantly increase productivity.
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2.4.3. Political –Economic Dual Nature Determinant of Bank Privatization 2.4.3.1. Political-Nature Side
Despite of outward economic appearance of bank privatization, political and legal factors are also the most influential factors in the privatization decision. Megginson, Nash, Netter, Poulsen (2004) in their study about the choice of private versus public capital market for privatization, indicated that in determining the privatization method, a government considers numerous factors, including characteristics of the markets and the potential investors, the institutional environment, and the firm itself, as well as considering its own political objectives. Political factors play a decisive role in the nature and timing of the bank privatizations studied, and in their eventual success or failure.
Political influences are especially important in SOB privatizations because SOBs provide a significant source of political rents. Verbrugge et al. (1999), and Shleifer and Vishny (1994) described SOBs as a powerful political tool, frequently used to reward supporters with high-wage jobs or favorable loans. Furthermore, Claessens and Djankov (1998), and Bortolotti et al. (2004) noted that governments use SOBs to channel funds that cover the losses of other state-owned enterprises. Such subsidies may be necessary because the other SOEs are also being used to garner political favor. Clarke and Cull (2002) argued that less stable governments may be unwilling or unable to accept the political risk involved in a large privatization. Accordingly, Megginson (2005) expected a positive relation between government stability and the likelihood of SOB privatization. The results of Netter et al (2004) revealed that in non-OECD countries greater political stability is associated with SOB privatization and there is opposite result for OECD countries. This is not entirely surprising since political risk is consistently lower in OECD countries and exhibits less variability than in the non-OECD countries. Boehmer et al. (2005) stated that SOBs may be valuable to politicians as “patronage machines” to build support through the channeling of funds to favored clienteles. However, a public official’s ability to capture rents from state-bank ownership may be limited by an institutional structure
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that provides accountability to voters. Greater public accountability would suggest less tolerance for off-budget financing of government, targeted spending on favored constituents, and other uses of SOBs for political advantage. For example, Shapiro and Willig (1990) submitted that a well-functioning political system restricts the ability of politicians to pursue personal interests. Bortolotti and Pinotti (2003) contended that the threat of competitive elections keeps public officials “on their toes” and mitigates a politician’s willingness to exploit SOEs for political or personal gain. Since politicians who are more accountable to voters may be less willing to expropriate value from SOEs, these politicians should view privatization as a more viable option. Therefore, greater accountability to voters, by limiting the ability to extract political benefits from SOBs should increase the likelihood of privatization.
Boehmer et al. (2005) submitted that in developing nations, there is much more variation in democratic accountability and its average level is much lower than in OECD countries The greater government accountability is associated with more SOB privatizations in non-OECD countries, but not in OECD countries. A complication is that government accountability to voters may be related to other factors. For example, in the case of banks, public pressure on politicians to privatize state-owned banks may be exacerbated by events such as a banking crisis. Clarke and Cull (1997, 2002) identified a significant increase in the likelihood of SOB privatization in Argentina following the Tequila Crisis. They further noted that the crisis intensified public support for privatization by exposing the politically motivated activities of the SOBs.
The success of earlier privatizations may also increase public pressure calling for the government’s sale of SOBs. As Megginson and Netter (2001) summarized, significant improvements in financial and operating performance of privatized firms and divesting governments to generate revenue without raising taxes due to privatization are of those indications that may strengthen popular support for SOB privatization more widespread. In the study of the privatization experience in Argentina, Clarke and Cull (1997) stated that government sales of SOBs become more likely over time. Accordingly, the probability of SOB privatization increases as
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time passes since the nation’s first privatization. To capture this effect, Boehmer et al. (2005) considered the time since first privatization for all country-years. For both non-OECD and OECD countries, the number is significantly higher for countries with a bank privatization. This suggests that privatization in general builds momentum for bank privatization. Detailed evidence on how political factors affect bank privatization comes from the hazard models estimated for Argentina in Clarke and Cull (2002). In this study they found that, Large, overstaffed banks in provinces with high levels of both unemployment and public sector employment were less likely to be privatized, which suggests that the strength of political opposition was also a key determinant of outcomes.
Political factors also affected the design of the privatization contract. Exogenous factors sometimes stimulated political reactions as well. Berger et al. (2003) found that the privatized provincial banks improved profitability, profit efficiency and portfolio quality, while showing no improvement in terms of cost efficiency or the ratio of operating costs to assets. These results suggest that the contract provisions that protected workers and limited branch closures made it more difficult for the privatized banks to reduce their costs.
By considering the timing of privatization as a political determinant, (mentioned in chapter one) indirect evidence on the effects of timing, and in particular the costs of delay, comes from comparisons of transition countries. Early in the 1990s, Hungary moved decisively to privatize its banks, and its political policy was to permit greater de novo foreign entry. As Megginson (2005) noted, the strategy paid substantial dividends, providing the country with a strong, stable banking system long before its neighbors. However, speed in bank privatization is not sufficient to ensure success. Bonin et al. (2004, 2005a) and Cull, Matesova, Shirley (2002) stated that the Czech government was quick to sell some of its ownership stakes in the four large banks that dominated the financial system, but they also chose to retain a sizable, and in some cases a controlling, interest in these banks. Performance improvements did not materialize, as the banks maintained their old links with their most influential former
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clients, who were often borrowing to channel funds into their private uses or to prop up unproductive firms. As noted above, it was not until a second round of bank privatization reduced government’s stake in the banks in the late 1990s that performance improved.
2.4.3.2. Economical-Nature Side
Strengthening financial systems has been one of the central issues facing emerging markets and developing economies because the sound financial systems serve as an important channel for achieving economic growth through the mobilization of financial savings. Most reformers believe that bank privatization should assist development strategic plans by mobilizing financial resources.
Beck et al. (2000) stated that allocating capital efficiently has been cited as a reason why financial development is associated with economic growth. Banks play an important role in the allocation of capital, or more specifically, in the way credit is distributed. Companies in many countries - particularly in those with less developed equity markets and weak shareholder protection - continue to rely on bank lending for financing.
La Porta et al. (2002) alluded that higher government ownership of banks in 1970 was associated with slower subsequent financial development and lower economic growth. Beck, Clarke, Groff, Keefer, Walsh (2001) identified the economic orientation of each country’s ruling government, classifying right-wing governments as those that favor less state control over the economy and left-wing governments as those that exert more state control. They wanted to show that how the executive’s economic ideology may affect the government’s likelihood of privatizing a SOB. Megginson et al. (2004) and Clarke and Cull (1997) used similar measures of ideology and find that a government’s economic orientation figures significantly in its privatization decisions. Boehmer et al. (2005) followed Clarke and Cull (1998), expected that a SOB is more likely to be privatized by a fiscally conservative (right- wing) government and regarding the economic characteristics, their data indicated 202
that the bank quality variables are critical factors in a government’s decision to privatize SOBs in both developing and developed countries. For the non-OECD countries, they found that measuring of banking sector quality significantly affect the probability of SOB privatization. Lower bank equity-capital ratios as an economic element, suggested a weaker financial sector. However, consistent with their predictions, there was a significant negative relation between the bank equity-capital ratio and the likelihood of SOB privatization.
A larger proportion of lending to the public sector is another financial indicator of poorly performing bank. Overall, these findings suggested that governments in non- OECD countries are more likely to privatize a SOB when the quality of the nation’s banking sector is poor. As an alternative measure of banking-sector quality, they gathered information on non-performing loans which The World Bank provides. The results were virtually unchanged. Therefore, they identified that the quality of the banking sector appears to affect the SOB privatization decision regardless of whether OECD or non-OECD countries.
In sum, there are significant differences in the factors that affect bank privatization in non-OECD and OECD countries. Political and legal factors as well as the quality of the banking system are important determinants in developing countries. In contrast, despite of economic factors, political factors do not significantly affect the likelihood of bank privatizations in developed countries.
2.4.3.3. Dual-Nature Side
Addition to political and economical arguments, Megginson (2005) opened a new discussion of “political economy” in the area of bank privatization as one of the main determinant and effective factors. He proposed that the rationale for including bank quality is similar to the rationale for including deficits. Poorly performing banks impose a larger fiscal burden on a government, which weakens the support base of politicians that oppose privatization. Bank failure, moreover, may be a source not only of substantial fiscal burden, but also may call taxpayers’ attention to the way 203
capital is allocated to members of the politicians’ support base. This may strengthen support for those politicians that favor lower taxes, and thus increase the likelihood of privatization. However, like deficits, bank quality may not explain much additional variation in privatization decisions when one controls for political party. Subsidizing a failing bank is, after all, only one piece of the fiscal puzzle, and deficits are already controlled for in the models that follow. Further, the performance of SOEs can presumably be hidden from taxpayers. However, if low bank quality provides a signal for the future fiscal costs of refusing to privatize, then it may provide additional information.
Megginson (2005) also submitted variable indications, whether opponents could block privatization in either the executive or legislative branch of government are; bank quality variables indicating the cost of continuing to support the public provincial bank; a fiscal deficit variable indicating the province’s ability to support money-losing enterprises; and a term-limit variable to capture the governor’s incentives to take costly actions.
2.4.4. Foreign Ownership in Bank Privatization
One of the aims of this thesis is to find out the probable importance or necessitation of presence of two issues of foreign investor and foreign bank in successful continuation of private banking in Iran that are completely absent in the present situation of the country. Therefore, specific focus on pros and cons of foreign investor participation in ownership combination of the private or privatized banks along with more deepening in the consequences of foreign banks operation will be discussed in the next parts of this chapter.
Apart from share offering of SOBs to the public, domestic investors or managers and employees, it may be done by involving the foreign investors either by competition with domestics or not. Previously (1.4.5.6), it was discussed the findings of studies about positives and negatives of the foreign ownership in general and in privatizing the SOBs in particular.
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In summary, greater bank performance, capital raise with clear effect on the existed operational potentials, new techniques and knowhow, staff education and better bearing the domestic economic crisis were all counted as the advantages of foreign participation in SOBs privatization. On the contrary, low operational risk, less interest in investing or participation in public projects with low return, less provided credits and facilities because of high risk management and influence of any choke in their mainland on their bank’s policy and activity in the host country were considered as the disadvantages.
Foreign ownership may bring better banking practices that improve the operation and security of the banking system. On the other hand, greater openness to foreign bank could intensify competition reduce profits and hurt stability. Thus, it is an empirical question as to whether, foreign bank ownership stabilizes or destabilizes a banking system (Claessens, et al., 2001). However, the simple correlation between foreign ownership and crisis is significant (Beck et al., 2005).
Clarke et al. (2004) found that where the government prohibited or tacitly discouraged foreign ownership in the initial round of privatization then, the privatization produces no performance benefits. Performance does improve after a subsequent round of privatization in which foreign ownership participation is permitted.
Bonin et al. (2003) strongly suggested that foreign ownership produced a much more stable banking sector and banks sold to foreign owners are not more cost-efficient immediately after privatization, but they do manage revenues more efficiently. Also while voucher privatization does not lead to any increase in bank efficiency, but, attracting foreign investor resulting higher profit efficiency.
Among the transition countries, Hungary is named as the first and the most successful experience country to embrace foreign ownership. Majnoni et al. (2003) explained that instead of following the recommendations made by western financial institutions, search for the “strategic foreign partners’ was the main vehicle for the government so that, in 1994, a year before beginning of bank privatization, the policy makers chose to establish an agency (the State Privatization Agency) to find "strategic" foreign investors and the institution made 205
conscious decision to seek out foreign ownership. During 1995-1999, parallel to the procedure of privatization they also work on the regulations to harmonize prudential and other banking practices with EU requirements with the objective of moving toward a universal banking type system. Majnoni, Shankar, Varheggi (2003) studied the dynamics of foreign bank ownership in the period 1994 to 2000. By the end of the year 2000, foreign controlled banks accounted for over two-thirds of total banking assets in Hungary. They conclude that after controlling for the nature of investment (Greenfield versus acquisition), management style and duration of ownership, foreign banks are pursuing a lending policy that does not differ significantly from domestic banks. Foreign banks are, however, able to achieve consistently higher profitability levels.
Mexico is another good example of confronting the foreign ownership in bank privatization. Haber (2005) argued that first experiment of Mexico took place with weak institutions to enforce contract rights. The result was reckless behavior by banks, and a collapse of the banking system and it was fundamentally flawed because of Mexico's political economy. In the second experiment (1997-2003) Mexico reformed many of the institutions that promoted bank monitoring and opened up the industry to foreign investment. Bonin et al. (2005) mentioned that banking sector performance in Mexico eventually improved, but only after a second round of privatization in the late 1990s in which foreign ownership participation was encouraged.
Among the multinational studies, Claessens, Demirgüç-Kunt, Huizinga (1998) examined the extent of foreign ownership in 80 national markets over the period of 1988-1995. They found that foreign banks achieve higher profits than domestic banks in developing countries, but exactly the opposite is observed in developed markets and an increase in foreign bank share leads to lower profitability for domestic banks.
Clarke, Cull, Martinez-Peria (2001) in study of 38 developing and transition countries strongly supported the assertion that foreign bank penetration improves firms' access to credit. Borrowers in countries with high levels of foreign bank penetration tend to rate interest rates and access to long-term loans as lesser constraints of enterprise operations and growth than
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enterprises in countries with foreign penetration. They also found that the benefits of enhanced credit availability apply to small and medium sized businesses as well as large ones.
In case of less success of foreign ownership of privatized banks, Bonin et al. (2005) show that initial attempts at bank privatization in the Czech Republic, and to a lesser extent Poland, were also not fully successful, at least in part because the state maintained relatively large shareholdings in the privatized banks and discouraged ownership by foreign investors. While government ownership of banks is associated with inferior performance, Claessens, Demirgue-Kunt, Huizinga (2001), Mian (2003), Bonin et al. (2005b), Micco et al. (2007), generally argued the preference of the foreign ownership of banks as associated with superior performance, higher profit and margin primarily in emerging markets of developing countries.
2.4.5. Foreign Banks Entry
This thesis has seen the foreign investor participation in banks ownership and foreign bank operation in banking industry as two distinctive subjects to be discussed as they are the two important absents in the capital and monetary arena of Iran. Thus, addition to the previous discussion of foreign participation in bank privatization, it would be a homogeneous overview in also to more deepen in the studies about the foreign banks entry into the banking system of the host countries.
Generally, foreign banks enter the banking system of the host country either through green field investment or merger and acquisition. The related studies are mostly concentrated on:
Different performance of the entered foreign banks from their domestic counterpart The impact of foreign banks on the different aspects of the host country Performance comparison of Greenfield banks versus merger and acquisition (M&A) banks.
First, as studying the performance differences between the domestic and foreign banks, Mian (2003) indicated that one of the main advantages of foreign banks in emerging markets is their
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ability to tap into external liquidity through their parent bank, which lowers their cost of funds. Taboada (2010) concluded that foreign banks exhibit superior performance relative to their peers. In particular, bank privatizations involving foreigners are associated with improved profitability and bank value.
Second, in the discussion of various foreign banks’ impact, Micco et al. (2007) found that foreign bank presence is associated with increased competitiveness of the domestic banks (lower margins and lower overhead costs). Claessens, et al. (2001) showed that foreign bank entry diminishes the profitability of domestic banks and reduces their non-interest income and overall expenses. They also argued that foreign ownership may bring better banking practices that improve the operation and security of the banking system but on the other hand, greater openness to foreign bank could intensify competition reduce profits and hurt stability. Beck and Jerom, (2005) suggested that in the countries with weak regulations, foreign banks may lobby more for regulatory improvements and legal reforms if they cannot take full advantage of regulatory or judicial lacunae. Although, it is not clear what would happen to the national benefits of the host country if the foreign banks could take the advantages of the weak regulations. Yet, the acquisition by foreign banks has changed the corporate governance structure of the Thai banks (Montreeva, 2000). Foreign entry appeared to improve the efficiency of Colombian domestic banks by reducing nonfinancial costs (Barajas, Salazar, and Steiner, 2000) and also foreign bank market penetration improves access to credit (Cull, Martínez-Peria, 2006). But credit to the private sector should be lower in countries with more foreign bank penetration (Detragiache et al., 2008). Increases in foreign bank presence are not associated with improvement in the competitiveness of the banking sector but is associated with improvement of banking sector margins and lower private sector credit. As foreign banks become more familiar with the domestic markets, their soft information disadvantages may become less severe, which may lead to an increase in their lending activities which could potentially jump-start economic and financial development (Taboada, 2010).
Third, entering via a green field investment allows the foreign bank to take advantage of its international reputation, particularly in less developed or less stable economies where depositors may feel more secure banking with well known foreign banks. It also allows
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foreign banks to target market segments, which would not be possible with the acquisition of a local entity, because it would leave the foreign bank with customer profiles of the old domestic bank which are incompatible or at least inconsistent with their overall market positioning of the parent bank and of which it is costly to make adjustment. However, entering via M&A of a local bank also has its own advantages that the other mode of entry has not. Indeed, it gives the foreign bank access to local knowledge. Moreover, where the strategy calls for a comprehensive retail network, acquisition may be the more feasible alternative, particularly if moving quickly is important. In addition, it also hands the foreign bank with immediate access to core deposits, which allows them to engage in local lending more rapidly. Finally, foreign acquisition may be advantageous for multinational banks about which little is known in potential host markets (Vo Thi and Vencappa, 2008).
Finally, foreign banks are significantly more efficient than their domestic peers while, bank size does matter in explaining discrepancies in efficiency between Greenfield banks and M&A banks. Indeed, the larger the bank, the more inefficient it is. This can be explained by the fact that Greenfield banks are of smaller size while M&A banks may suffer from diseconomies of scale due to their acquiring large institutions. Greenfields engage more on investments and off-balance-sheet activities, while M&A banks tend to inherit a portfolio composed of a larger proportion of loans from the old domestic banks, which may explain the superior performance of Greenfields. They also concluded that the time passing has significant impact on M&A banks and Greenfields. The older the M&A banks get, the more likely it is they will have got rid of many of the problems inherited from the acquired domestic banks and tends to be more cost efficient.. In contrast, as Greenfields grow older, they tend to become less cost-efficient (Vo Thi and Vencappa, 2008).
2.4.6. Role and Effects of Ownership in Bank Privatization
Reassessment of relationship between bank ownership and bank performance is the principal focus for most of the related studies. However, the general ownership collection cannot be out of; state, public, domestic, foreign and sometimes a combination of them such as the partnership of domestic private sector with the public institutes or foreign investors. However, selection of any kind of ownership for privatization at the first step is directly due to the 209
political nature of privatization. In other words, the country condition is the first determinant factor before market condition.
Bonin, Hasan, Wachtel (2004, 2005a) studied the impact of private and foreign ownership on bank performance in transition countries and find robust evidence that profitability-measured by return on assets and return on equity- is higher for fully private banks than for banks with some state ownership, and is the highest of all for wholly foreign-owned banks. Foreign banks also experience the most rapid increase in customer loans. Taboada (2008) concluded that increases in domestic block holder ownership of banks are associated with deterioration in capital allocation efficiency. Countries experiencing an increase in domestic block holder ownership of banks tend to allocate more credit to industries that are less productive and less dependent on external financing, which suggests a misallocation of funds by domestic block holders. La Porta et al. (2002) argued that banks controlled by large domestic block holders, who usually have substantial interests in other nonfinancial firms, direct a significant portion of their lending activities to related, yet inefficient companies. Bonin et al. (2003b) described how the unstable macroeconomic situation made privatization infeasible in Bulgaria and Romania until the late 1990s. By that time, the state banks had suffered such large losses and the government preferred to go for substantial re-capitalization to make the banks attractive to investors, especially foreign investors as the best choice.
In addition to offering shares to the public, to the managers and employees of SOBs, or to the domestic investors, it also may be down through permitting the foreign investors to be involved. This involvement can either be in competition with domestic investors or totally in seceded condition. Yet, like any other issue of privatization, there can be a tradeoff between the positives and negatives of the foreign ownership specifically in privatization of state- owned banks.
Micco et al. (2007) stated that in the case of industrial countries there is no correlation between bank ownership and bank performance, but that there is a strong correlation between bank ownership and bank performance in developing countries. In sum, foreign ownership in banking industry does not necessarily have always a multilateral constructive role. Some often, the prudent behavior in their lending policy becomes a conflict of interest with the 210
borrowers beyond the social expectation and tolerance. In sum, the gist of studies on the subject of foreign ownership in privatized banks has shown both sides of positive and negative role and impacts.
As positives, foreign ownership can cause greater bank performance than any other types of ownership. It is a doer of capital raise with clear effect on the existed operational potentials. The foreign owners could bring the new techniques and know-how and educate the staff and even the customers with higher professional views and cultures. More often but not always, resist to non-essential politician’s penetration. And even they better can bear any domestic economical crisis because of their potential of external financing.
As negatives, foreign ownership shows trend to lower their operational risk, therefore, especially in developing countries they would not cover the great part of demands which include the poor-level people and any projects with low return on investment (ROI). Also because of importance of ROI to them, they would be very cautious and precise about the creditability of the customers which would be a limited factor in providing credits and facilities. Although that they resist to great amount of economical crisis in the countries they have invested, but any shock crisis in their main country will have a negative impact on the bank’s policy and activities.
To give more extensive account of positives and negatives among the studies, Claessens, et al. (2001) indicated that foreign ownership may bring better banking practices that improve the operation and security of the banking system. On the other hand, greater openness to foreign bank could intensify competition reduce profits and hurt stability. Thus, it is a question whether the foreign bank ownership stabilizes or destabilizes a banking system. However, Beck et al. (2005) stated that the simple correlation between foreign ownership and crisis is significant.
The findings of Montreeva (2000) from studying the foreign entry into the banking system of Thai were: change in corporate governance structure of the banks, operational improvements focused on cost cutting, availability of adequate funds for capital, infusion of advance technology and expertise to operate efficiently, introduction of new banking products, and 211
acquisition of consumer marketing skills, targeting retail customers and small- and medium- sized enterprises, high investment in modern technology and equipment and a huge budget for public relations. Yet, the rising of public objection to employee lay-off in privatized banks is noticeable.
Clarke et al. (2004) and Bonin et al. (2003b) found that the government did not produce performance benefits because they prohibited or tacitly discouraged foreign ownership in the initial round of privatization. Performance did improve after a subsequent round of privatization in which foreign ownership participation was permitted.
Haber (2005) explained that first experiment of Mexico took place with weak institutions to enforce contract rights. It also took place without institutions that encourage prudent behavior by bankers. The result was reckless behavior by banks, and a collapse of the banking system. In the second experiment (1997-2003) Mexico reformed many of the institutions that promoted bank monitoring and it opened up the industry to foreign investment. As a result bankers behaved prudently, but prudent behavior in the context of weak contract rights implies that banks are reluctant to extend credit to firms and households.
Hungary was the first country in the region to embrace a large degree of foreign ownership. Megginson (2005) indicated that the policy makers chose not to follow some of the recommendations made by western financial institutions. Instead, the vehicle that led to foreign ownership was the search for "strategic foreign partners" through the special created agent. As an advantage of foreign domination of the banking sector Abel et al. (2002) stated that it can better absorb the impact of some economic shock because foreign banks have ready access to liquidity (and expertise) outside the country's borders. Of course, this advantage can be negated if the bank's country of origin suffers the same shock. Claessens, Demirgüç-Kunt, Huizinga (2001) found that foreign banks achieve higher profits than domestic banks in developing countries, but exactly the opposite is observed in developed markets. Clarke, Cull, Martinez-Peria (2006) strongly supported the assertion that foreign bank penetration improves firms' access to credit. Borrowers in countries with high levels of foreign bank penetration tend to rate interest rates and access to long-term loans as lesser constraints of enterprise operations and growth than enterprises in countries with foreign penetration. The benefits of 212
enhanced credit availability apply to small and medium sized businesses as well as large ones. The resulted conclusion by Clarke, Cull, Martinez-Peria, Sánchez (2001), Berger (2003), and Megginson (2005), indicated that foreign ownership with the upward trend in developed and developing countries, is efficiency enhancing and tends to be more prudent, which may result in less lending in weak regulatory environments. Beck and Jerom, (2005) suggested that it is better to privatize even with weak regulation, rather than await reforms that may be a long time coming. Selling to foreigners may be especially important in a poor regulatory environment since they face regulation in their home country that may curb their opportunism as evidenced by the bias towards prudence. They may also lobby more for regulatory improvements and legal reforms if they cannot take full advantage of regulatory or judicial lacunae.
However, new wave of bank privatizations has led to significant changes in bank ownership structure around the world. Especially in many post-communist countries government ownership of banks has been replaced by foreign ownership of banks and initial attempts at bank privatization were not fully successful in those countries that the state maintained relatively large shareholdings in the privatized banks and discouraged ownership by foreign investors (Bonin et al., 2005a).
Overview of the related literatures also reveals that foreign banks; are more profitable than their domestic counterparts in developing countries, but the opposite is true in developed markets (Claessens, Demirgue-Kunt, Huizinga, 2001); have higher margins and profits than domestic banks in developing countries, but the opposite is true for industrial countries (Demirgüç-Kunt and Huizinga 1999); have higher profitability, lower costs, and lower employment ratios than their domestic counterparts in developing countries and have higher non-performing loans than their domestic counterparts in developing countries (Micco et al. 2007, Majnoni, Shankar, Varhegyi 2003 and Bonin et al. 2003b); have ability to tap into external liquidity through their parent bank, which lowers their cost of funds (Mian 2003) and; have cost advantage in lending to larger, more transparent firms but not in lending to smaller and in all possible equilibrium conditions foreign bank entry only benefits more transparent firms, while other firms are either indifferent or worse off (Detragiache et al., 2008). Foreign
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bank entry diminishes the profitability of domestic banks and reduces their non-interest income and overall expenses (Claessens et al. 2001), improves the efficiency (Barajas et al., 2000), improves access to credit (Clarke, Cull, Martínez-Peria, 2006) and, is associated with increased competitiveness of the domestic banks (Micco et al., 2007).
More recently, Detragiache et al. (2008) predicted that credit to the private sector should be lower in countries with more foreign bank penetration and resulted that foreign banks are better than domestic banks at monitoring “hard” information (e.g. accounting information, collateral value), but have a disadvantage in monitoring “soft” information (e.g. entrepreneurial ability). This leads foreign banks to lend to safer and more transparent customers. Once these hard information customers are separated from the pool of borrowers, the remaining soft information borrowers are left in a worse pool, which causes them to either pay higher interest on their loans, or not borrow at all. This leads to an overall reduction in credit to the private sector.
Taboada (2010) concluded that foreign banks exhibit superior performance relative to their peers. In particular, bank privatizations involving foreigners are associated with improved profitability and bank value and increases in foreign bank presence are not associated with improvement in the competitiveness of the banking sector. Increases in foreign presence actually improve the banking sector margins. Detragiache et al. (2008) indicated that foreign banks tend to target only the best hard information borrowers which can adversely affect credit availability, Taboada (2010) submitted that as foreign banks become more familiar with the domestic markets, their soft information disadvantages may become less severe, which may lead to an increase in their lending activities. He also indicated that increased foreign bank lending activity could potentially jump-start economic and financial development. It remains to be seen whether this will actually occur. Moshirian (2001) analyzed FDI in banking sector for the US, the UK, and Germany finding that the factors impacting FDI in financial services are different from the determinants of FDI in the manufacturing sector. The determinants of FDI in banking are; bilateral trade, banks’ foreign assets, cost of capital, relative economic growth, exchange rates, and FDI in non-finance industries.
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Megginson (2005) and Guriev and Megginson (2007) make an important distinction about the benefits of foreign participation in bank privatization through the analysis of transition countries. Fundamental reasons why foreign strategic investors are important to the banking industry in small open economies include:
Foreign direct investment in banking is as attractive as any other FDI; it is a fixed asset and represents a long-term commitment. Foreign ownership helps clarify private sector control that is independent of the government and creates greater depositor confidence. Foreign banks are able to transfer modern banking technology easily. Foreign banks and the threat of entry increase competition. Foreign ownership reduces the potential for politicization of bank lending and increases the international integration of financial markets.
Radelet and Sachs (1998) argued that foreign bank ownership may reduce the likelihood of financial crises and would have significantly reduced the seriousness of the recent financial crises in Asia. Making foreign investors responsible for the consequences creates a disincentive for deleterious, speculative short term financial flows. Hence, lending by foreign- owned banks will be more stable than cross-border lending by international banks to local banks. Thus, foreign bank ownership may be in the national interest if it provides some insurance against speculative flows of short term capital and helps the financial system absorb such flows.
Foreign banking interest is a genuine market test of the value and soundness of domestic banks; hence it is a useful signal when local financial markets are too thin or too small to provide such information.
Beginning in the early 1990’s, the experiences in Hungary, Poland and the Czech Republic are good examples of learning by doing in bank privatization. Since the banking market in many transition economies and developing countries is quite small, only a small number of domestic banks are viable. This is surely the case in Hungary and the Czech Republic although perhaps a little less so in Poland. Hence, the threat of entry and not large numbers is the most likely 215
source of competitive pressure. In summary, three basic lessons for promoting healthy and financially stable banking sectors in any small open economy can be drawn the experiences of bank privatization in the fast-track transition economies.
Bank restructuring and privatization must be sequenced carefully to create the appropriate incentives for lending on a commercial basis only. Privatization requires a credible transfer of control from the state and often a change in the current management of the bank. The proper corporate culture is most easily established by attracting a strategic investor who is more likely than not going to be a foreign financial institution.
These lessons apply equally to developing countries with evolving mixed banking sectors as well as to transition economies looking to create market-oriented banking sectors.
2.4.7. Concluding Remarks
1- Political factors significantly affect the likelihood of bank privatization only in developing countries and specifically, in non-OECD countries, but economic factors are significant determinant in both OECD and non-OECD nations. 2- Fiscal pressure is related to the SOBs privatization decision only in OECD countries. 3- There is more benefit to the national politicians to privatize banks where off-budget targeted spending, and thus the economic cost, is large. 4- SOB privatizations can create many new shareholders, but not more than other types of privatizations that typically have an even larger impact on stock market development. 5- Governments may choose to privatize SOBs to improve access to private funding and reduce the state’s involvement in capital allocation. 6- In low-income countries, SOBs privatization is less to the advantage of women rather than men. 7- State owned banks increase the risk of bank crisis, instability, corruption and decrease the favorable banking outcomes, profitability and management efficiency. 8- Timing of SOBs privatization is a political determinant while, speed in bank privatization is not sufficient to ensure success.
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9- Governments in non-OECD countries are more likely to privatize a SOB when the quality of the nation’s banking sector is poor. 10- Selection of any kind of ownership for privatization at the first step is directly due to the political nature of privatization. 11- Offering shares to the public, to the managers and employees of SOBs, or to the domestic investors may be down through permitting the foreign investors to be involved either in competition with domestic investors or totally in seceded condition. 12- Bank performance improves more in full privatization and much more when foreign ownership is permitted. 13- Foreign banks exhibit superior performance relative to their peers but their presence is not associated with improvement in the competitiveness of the banking sector.
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Part 3
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3.5. Chapter Five: COMPARATIVE OVERVIEW OF IRAN’S BANKS PRIVATIZATION AND THE WORLDWIDE EXPERIENCE 3.5.1. Introduction
There are much less theoretical and empirical literatures on privatization of financial firms, especially in banking area, than has been generated for privatization of non-financial firms. It is not far beyond the fact that the difficult access to the clear and comprehensive data and information for pre and post privatization in the banking function can be considered as the main problem for this inadequacy. As it has repeatedly been described in chapter three and four, the banks are indispensible tool for the governments and politicians through which they can offer favorable loans to political supporters and provide off-budget financing to cover their shortages and behind it. Therefore in general, for such a political multifunctional tool any transparency expectation or easy accessibility cannot be so realistic specifically in those countries with less active fundament social institutions. The more politicized country’s condition and more single-voice governing cause more opaque and difficult condition to provide the reliable studies. Therefore, dissemination of logical necessity of privatization has also included the banking industry so much that Fiorentino et al. (2009) stated it as a dramatic process over the last two decades and indicated that technological progress and the globalization of financial services have exposed banks to increased competitive pressure and forced them to optimize their operations and productivity, often through mergers and acquisitions by considering that the deregulation of the banking industry has also played an important role in this regard.
However, as a comparative overview in this chapter, the worldwide experiences of bank privatization will be set next to the related experience occurred in Iran and there will be an effort to provide the main key questions of bank privatization propounded in worldwide scale and find out to how extent and deep they had been answered or considered in the case of Iran.
3.5.2. Evolutionary Transition towards Iranian Banks Privatization
Banking in Iran has a 90 years history. Before the Islamic Revolution, no privatization in banking system had happened but instead, there was an open area for operation of private 219
banks. The private banks were active in the market either through the investment of domestic investor (e.g.: Saderat Bank) or foreign investor (e.g.: Bank-e Jadide Shargh) or by partnership of local and foreign investors (e.g.: Iran and Japan Bank). Before Islamic revolution of Iran in 1979, there were 36 active banks including 8 state owned banks, 16 private banks with 100% domestic ownership and 12 private banks with the partnership of domestic and foreign investors. In June 1979, the Revolution Council nationalized all the banks in the country and in less than a year, some of the nationalized banks were merged within.
In 2000, for the first time after the Islamic Revolution, Dr. Mohsen Nourbakhsh, the governor of Central Bank of Islamic Republic of Iran, issued the legal ground for founding the private banks with some ambiguities on why the Central Bank has focused on activating the private banks instead of privatizing the SOBs? This action took place while the general process of privatization (as indicated in chapter three) was confronting many opposite political challenges imposed by the pressure groups. The banking sector was in a complete passive attitude with not sufficient contributive effort to the economic growth. Despite of fix low interest rate of banking system, its suspended management situation had enforced the interest rate in black market to exceed 40% which was ruing the production sector. The whole banking system was owned by government yet was placed in mired of problems and none of the prerequisites for banks privatization was achievable. The existed social and political situations did not let any change in the fixed assets and inflated manpower of SOBs which were inevitable necessities of bank privatization. The extremist political slogans had made impossible any foreign participation which could be one of the basic solutions for the inefficient banking management and capital raising. Financial reports of SOBs were facing a serious lack of financial health such as capital adequacy and the minimum acceptable indexes with huge amount of government debt to the banking system. Additionally, there was no symptom of market liberation in coming future, which is one of the essentials of privatization especially in the banking industry.
In 2000, according to the legal grounds issued by the Central Bank of Islamic Republic of Iran, the operation of private banks started with the establishment of four banks in the first year and reach to eleven banks by the end of 2010 with many other in the queue of starting
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procedure (Appendix 8). In all the cases, the subscription of private banks received the most welcome from the capital market, including semi-government institutions, individuals and legal entities. Addition to many impacts of private banking, it was an important step to gradual providing the primary conditions for SOBs privatization both from political and economic aspects. In fact, it can be considered as the best and serious economic reform emerged in Iran during the past three decades till the end of 2010.
3.5.3. The Impacts of Private Bank Reform in Iran
The major aims of promoting the private banking in Iran firstly was gradual paving the road for SOBs privatization and next, involving the wander money in the market that had not been absorbed in productive areas neither through direct investment nor privatization. Although the preparation policy for SOBs privatization took nearly ten years to obtain the result but the absorption potential of private banking for wandering money was astonishing. More than that, there were so many other impacts as on; capital market, corporate governance, financial elements and functions, human resource, banks’ operation and finally, an enormous difference in credit allocation policy with a great success both for the private banks and the borrowers in different productive and services sectors. The latest was also consistent with those literatures, linking ownership and competition to performance of banks focuses on the credit allocation efficiency. Piesse and Bhaumik (2004) stated that if bank credit is allocated to the most productive projects, the probability of project failure and, therefore, probability of banks losing money on their advances is not significant. The ability of banks to allocate credit to the most productive projects at a low cost to themselves, in turn, is believed to be dependent on their ownership structure and the extent of competition they face. Specifically, it is believed that even though private ownership of banks is not necessarily a panacea in so far as financial performance and productivity is concerned, by and large, a state owned bank is likely to be less capable of – and, perhaps, less inclined to – accurately assess the risk associated with individual projects and borrowers. In other words, the allocation efficiency of credit increases with the increase in the relative size of privately owned banks in the banking industry of a country.
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3.5.3.1. Impact on Capital Market
In the absence of proportional volume of direct investment in productive areas, the private banks has been the most long-term investment case in the country even though, some portion of this investment through Stock Market and by real investors cannot be included in this category. However, this investment occasion not only collected some portion of wandered money but also motivated the different functions and upgraded some other aspects in capital market.
For the first five years (2000-2004) of private banks operation, the registration of three private banks in TSE and the entrance of all private banks into this market as the investors (according to investment permission of private banks in the stock market up to the limit of 30% of the registered capital of the bank), caused an enlargement in the size of the market addition, to increase of the transactions and liquidity of the stocks and for the first time to activate the two area of convertible bonds and commodity markets (e.g.: agriculture and metal exchange market). The principal economic payoff from increasingly efficient and liquid capital markets comes from the provided financing opportunities and monitoring possibilities. Efficient capital markets promote economic growth and allow individual firms to fund investment opportunities that they otherwise would have to forgo. Therefore, the attendance of private banks deserved a good deal of credit for whatever it has directly or indirectly played in promoting stock market development.
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Table5. Capital Structure of Private Banks 2001-2010
Subject 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
No. of private banks in 2 4 4 4 6 6 6 6 10 11 operation
No. of private banks with capital increase including 2 2 2 2 5 2 4 3 6 4 new entered banks
Yearly capital injection by 450 510 531 2,159 10,535 1,350 5,350 4,350 10,700 20,000 shareholders*
% of Yearly capital -- 11.65 4.1 306.6 388 (87) 296.2 (18.7) 146 87 injection change
% of Yearly cash injection to the PBs/ Liqiud cash 0.1 0.3 0.2 0.45 0.6 injected to the market**
Total investment by shareeholders of private banks during 2001-2010: 55,935 Billion Rl.
* Billion Rl.
** compiled with the figures for yearly liquid cash injected to the market in table 4
Source: Individual Annual Report of all the Private Banks for fiscal year of 2009 and Tehran Stock Exchange website for the year 2010
Usually the most effective policy instrument is open market which can effect broad money growth in the shorter period of time. But since 2006, this effective role of the private banks in the capital market has declined with a harsh descending slope. Comparison of the capital injection to the market for 2006-2010 (Table 4) with the 223
capital injection (excluded deposits) to the PBs (private banks) in Table 5 shows a ratio of less than 1% for private banks share during the past five years. Such an insignificant absorption share of the private banks from the injected capital to the market has been the cause of their extreme prudential behavior towards the decision for capital raise despite of market welcome shown in any occurred case. This leads to investigate its reason in any other area rather than the capital market.
Running of many econometric models in Iran approves that there is a positive correlation between broad money and inflation growth. Komaijani (2003) stated that each 1% growth of broad money in Iran had caused 1% growth of inflation. Bearing in mind that the three main factors of financial deepening are growth in: foreign trade, capital market, and monitory market then, he concluded that for 2000-2003, the private banks had positively influenced the growth of both monitory and capital markets through collecting the market money and lead them either to different services oriented businesses (monitory market growth) or activate the stock market (capital market growth).
In the absence of strong active private sector, the private banks have had an important role in leading the collected market money to different productive and service oriented activities through formation of conglomerates. Each private bank gradually became a conglomerate including various types of companies such as; insurance, leasing, currency exchange, stock brokerage, investment s, construction, consultant companies and etc... With the formation of these conglomerates, the flow of cash, especially the wondering cash, found the new passage in which the wealth and financial services could be provided and in fact, promote the economical development. Also this new kind of capital cash flow or liquidity more frequently equipped and consolidated the capital market which is again a motivator to the economical development. Because of new functions for cash flow it was also an aid for controlling the inflation rate. During 2006-2010, six more private banks of Sina, Tat, Day, Shahr and Ansar were established by the semi-government institutes along with 59 affiliated companies under the management of first five founded private
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banks as: 24 by Pasargad, 13 by Eghtesad-e Novin, 11 by Parsian, 7 by Saman and 4 by Kar Afarin. Addition to the aforesaid fractions of affiliated companies, in October 2010, Pasargad Bank by offering the issued shares of one of its holding (Pars Arian) in Stock Market, successfully raised its capital to 8,280 billion Rl. as the largest holding company of Iran.
Founding of private banks in 2000, gradually mitigated the effect and penetration of unorganized monetary market which fallowed by inclination in the interest rate. The general evidence in the market and unpublicized reports of Central Bank, tracing the interest rate in unofficial money market of 70 big cities indicated that the interest rate in unofficial money market felt down in a short time from 38%-40% to around 22% in 2002-2003, after the activation of private banks.
3.5.3.2. Impact on Corporate Governance, Demand VS Result
It should be asserted that, despite of the conditions before the activation of the private banks, it did not take so much time for the policy-makers and academicians to recognize the importance of upgrading the corporate governance. A nation’s corporate governance system can be defined as the set of laws, institutions, practices, and regulations that determine how limited-liability companies will be run and in whose interest. Evidence of the professional’s interest in corporate governance is not hard to find. Several countries and multilateral agencies have recently published “codes” or “principles” of good corporate governance practices, such as OECD (1999). In the academic arena, one of the recent growth areas in corporate finance has been the interaction between law and finance, highlighted by cross-sectional studies of the determinants and effects of international differences in securities law and corporate governance. Guriev and Megginson (2007) argued that corporate governance generally, and corporate legal systems specifically, significantly influence capital market size, ownership structure, and efficiency.
Most importantly, there is a difference between countries in the degree that their legal system protects investors, which in turn affects the development and operation of 225
external capital markets. In any event, the framework and operation of a country’s legal system impacts the operation of financial markets and corporate governance in that country. Similarly, the structure and operation of a country’s legal system will affect the impact of privatization.
In Iran, at the beginning of the private banks’ operation, the existing level of observation and controlling system by Central Bank was not suitable and effective as it should be. Yearly growth of financial balance from 2000-2006 for PBs was 185% and for SOBs less than 20% (Central Bank Published Statistics, 2007). Therefore, Central Bank through a very serious re-evaluation of quality promotion, found out the need of upgrading its governing position with specialized and expert people to enforce the fresher views. Although the upgrading target was not achievable overnight yet, the effort did not take long and the result compared to demand was insufficient due to: alternately change of the Central Bank governors since 2005, pervasive retiring its key educated members, no specific indications of joining high qualified people to its expertise body, and unprecedented domination of the government up to the limit of neutralizing the major authorities of the Central Bank. All together, have taken the observation potential of Central Bank next to its independent observation authority under a remarkable doubt. On the other hand, inadequate complementary compilation of corporate governance has definitely slowed down the compatibility of country’s banking system with the international banking aspects.
3.5.3.3. Influential Interactions with the Competitors
Iranian PBs have been confronting with two groups of official and unofficial competitors. No doubt that the privatized banks also meet the same situation as their predecessors (PBs). However, from PBs viewpoints the official competitors are applied to all the official segments of capital market including the other PBs and SOBs while, unofficial competitors are specifically applied to unofficial credit cooperatives active in money market. On one hand, the PBs had an impact on state-
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owned banks and on the other hand an influential interaction with the PBs and unofficial credit cooperatives.
Table6a. A comparative glance on Private and State-owned Banks in Iran
(March 21, 2009)
Performance/Billion Rl. Tools Optimization
Facilities to Bank Type Education Total Non- No. of No. of Deposit/ Facilities/ Employee Weight of Deposit Governmental Branch Employees Employee Employee / Branch Employee* Clients
SOBs 1,894,587 1,899,723 16,525 180,677 0.46 10.5 10.9 10.5
PBs 517,865 420,926 1,230 14,582 0.850 35.5 11.8 28.8
*Education-weight of employee is calculated by weights of 2, 1.5, 1, 0.5 and 0 in order of Doctoral, Master degree, Bachelor degree, College degree and below the College degree
Source: Omidi Nejad, 2009
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Table 6b: A comparative glance on Private and State-owned Banks in Iran
(March 21, 2009)
E-banking Optimization
No. of No. of No. of No. of Bank Type Online PINPAD Issued TM ATMs* Branch & POS Cards
SOBs 12,771 15,091 663,389 55,300,630
PBs 1,229 2,050 392,402 12,745,940
Total 14,000 14,141 1,055,791 68,046,570
*ATM: Automatic tiller machine
Source: Omidi Nejad, 2009
Tables 6a and 6b clearly demonstrate the significant optimization difference between the PBs and SOBs. The better situation of the PBs in the matter of efficiency (table 6a) is mainly because, the private banks like any other private sector are profit conscious. The higher education weigh of the employees is one of the efficient policy to duce their cost. Assuming the consistent effort for all the branches of PBs and SOBs, the proportion of issued TM card per branch (table 6b) is 10362 of each branch of PBs and 3346 issued card per SOBs. Certainly, this better performance of PBs` branch is partly obligated to the more educated employees` effort and partly because of high scattered branches of SOBs in all over the country including faraway towns with less interest in e-banking tools (e.g.: issued TM card) which is the consistent reasoning with 77% of online branches of SOBs compared with 100% online branches of PBs.
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In Iran, like any other country, the competitive impacts within the private banks were so regular to make it needless of any extra explanation. Any new decision in policies, rates or, service providing by one private bank was carefully observed and traced by the others to take a necessary actions and laissez-faire approach was moderately implemented for the PBs. On the other hand, the attendance of private banks’ managements with a sense and perception of private sector (even in a diluted form) caused a big deal of internal and external impacts in country’s banking system. As an internal impact, a very considerable amount of cost reduction with much better organizational structures did attract the attentions of state-owned banks management. The ascending efficiency of private banks especially in relation with the number of branches and the staff were also an important hint for the state-owned banks. The comparison of figures about the number of branches, market share and the variety of productions in both private and state-owned banks in tables 6a show that the organization cost in state-owned banks was four times of private banks in 2006/2007.
The customer oriented management was one of the most competitive issues within the private banks and had a very vast and positive feedback in the society. Observing such a win-win policy enforces the state-owned banking system to implement the gradual changes in their services as much as they could or they believed. But all in all was indeed, a very superficial change (e.g.; renovating the branches) because of their governmental management perception.
3.5.3.4. Impacts on Institutional Reforms
Fulfillment of private banking in Iran was a phenomenon that even enforced the Ministry of Economic Affairs and Finance to revise its views on many subjects especially to do reform for tax adjustment and endeavor to issue the newly required permissions. It was clearly after the appearance of private banks in the arena of economical activities that the tax rate for the private sector mitigated from its highest rate in the Middle East to the 25% flat rate.
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To fallow the created acceleration, many founding permission has been issued by the Ministry of Economic Affairs and Finance in:
Rating Agency
Financial structure restoration
Investment banking/ financial and credit financing Agency
Regaining the delayed claims agency (this one behaves as an aid for the banks, insurance and leasing companies to revive their claims).
The National Auditing Institution, as the highest country’s auditing responsible, the same as Central Bank, was obliged to promote and redefine the standards and the regulations up to the international levels. In the website of this institution there are more than 30 regulations that have recently been revised or compiled within the international frameworks. Another important event was gradual elimination of monopoly of auditing the private companies by The National Auditing Institution and shifting this market share of “auditing the companies” to the private or independent auditors. This kind of authority delegation to the independent auditors caused a great deal of clearness in the different aspect of capital market. As a result, naturally the auditors intended not to take a risk of sacrificing their professional credit by deviating the rules and standards because at this situation the National Auditing Institution is not only their observer but also their rival. Therefore, this professional performance and its valuable results and impacts were also obligated to the matter of bank privatization.
Transmission of occurred reform from banking to insurance was inevitable. In less than a year, the central Insurance Institute of Islamic Republic of Iran started to issue the permission for the private sectors to be activated in the insurance market. Central Insurance of Iran (2008) reported that at the end of 2007 there were 10 private Insurance Companies (6 in mainland and 3 in free zones) next to 4 state-owned
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insurance companies (Appendix 8). For the period of 2004-2007, the market share of private sector in insurance industry reached to 30%. Once more in 2009, in the insurance industry, as a loyal follower of banking industry, the shares of three (Alborz, Dana and Asia) of the four state owned insurance companies were offered in TSE as part of the privatization plan of state-owned banks and insurance companies mentioned in Article 44.
3.5.3.5. Revival of Human Capital
For a country like Iran with more than 45% of its population under the age of 35 years, the human resource should be assumed as the most important national capital. Despite of continuous high rate of unemployment (8.3 to 33.2 percent during 2000- 2008) however, bringing the trained young generation among this “ocean of human capital” into the job market was one of the most important national contribution and manifestation of activation of the PBs.
After so many years of stagnation in the business market of Iran, the private banks educated thousands of the young and fresh university graduates, and involved them in different banking task with providing a suitable promotion conditions based on individual’s potential and organization loyalty (Table 6a) while, as deputy Minister of Economic Affairs and Finance, Pourmohammadi (2009) stated, more than 70% employees of SOBs were not university graduates, with no intention to improve the case. The same reasoning is presented in table 6a as the education weight of the employees in both PBs and SOBs.
3.5.4. Government Intervention, Determinant Challenge
The primary strong and constructive competition within the newly established private banks was re-introducing the forgotten concepts of banking management and services. For the first time in three decades, the managements’ of private banks were relying on hard budget constraint and coincidentally targeting the benefits of their shareholder next to the satisfaction of their clienteles. In other words, they were coincidentally working on the profitability and
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providing new products and services. Surprisingly, the extended impact of PBs activation was so bigger than the body itself yet the honeymoon of the private banks did not take long.
In September 2006, the recently appointed president, indirectly applied a harsh attack to the most successful and the largest private bank (Parsian Bank) and extended his critics to the whole concept of private banking by introducing them as a blood sucker of the people and raised some gigantic questions such as: nobody knows how they have got so much money for capital raising and etc. (Ahmadi Nejad, 2006). This ongoing negative attitude to the private sector in general and private banks in particular caused a great deal of erosive effort for the private banking system. In fact, most of the implemented policies and decisions made by the government, neutralized the real meaning of private sector, narrowed the deference of the nature and operation systems between the private and state-owned banking, diluted the management potential and innovations, kept the banks’ size in a very small scale (table 5) and caused disordering in the capital market (mentioned in 5.3.3).
To subjugate the private banking (like any other private sector), the government took three main steps.
First, in October 2006, the Central Bank was ordered to announce the board of director of Parsian private bank unqualified and ousted them of their jobs. This was a clear message to the managements of private banks to consider their unwritten boundaries in all aspects. Definitely, it was also a very effective action to make them more conservative and lessen their motivation and courage very below the requirement of financial private sector.
Second, in 2007, by government’s order, all the interest rate for depositors and borrowers were decreased and became equal for both private and state-owned banks. It demolished the transparency of the competitive environment in banking system and enforced the private banks’ management to implement other opaque policies to apply the higher rates for survival.
Third, for 2006-2010, only the semi-government institutes succeeded to get the legal ground to establish private bank and also the rate of ownership of the semi-government institutes in previously established private banks gradually increased as much as possible.
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Although, the government’s intervention was not limited to the mentioned steps and its extension was beyond ignorance even by SOBs. In 2007, the research center of Saderat Bank (state-owned at that time) listed the government’s intervention affected on the banking system health as follow:
Compulsory decreasing the interest rate Doubtful statements and excessive inspection on the financial institutions apart from the Central Bank Neglecting the independency of the Central Bank Precipitate and consecutive change in the management of both private and state-owned banks Creating an ambiguity condition for the interest rates in the capital market even for a short time future which has caused a great inclination on the volume of long-term deposits. And has reciprocally directed the market cash to other investment area such as property, gold and foreign currency, apart from the huge escaped capital Prohibit all the diversified profitable operations and investment which gradually efface the role of private banks in different aspect of the economical growth. The government’s intervention transmitted to other related fundamental sections such as stock market and disordered the capital market and cause the wander money flow more toward unproductive areas, limit the credit potential of banking system and reciprocally raise the interest rate in strengthened disorder money market outside of the banking system and out of the Central Bank’s control.
As a summary, it is presumed that the government chose to “governmentalize” the private- owned banks rather than to privatize the state-owned banks.
All the aforementioned argument about the government’s intervention in PBs should not occurs to mind that the boundary of intervention can be limited to the private banking system. In fact, normally the governments never would take two different positions towards private and state owned banks. Accordingly, addition to the interventional behavior of the government towards the private banking system, its dominated behavior towards the state-owned banks is a very conceivable position. 233
During 2005-2010 (1384-1389 in Iranian calendar) with no prediction for later on, the government’s intervention and enforcement in the detailed operation of SOBs was almost the excess. The government, by continuous increasing its debt amount to the state banking system, not only weakened the financial structure of state banks as shown in table 7, but also diluted the observance role and independency of the Central Bank, so that it seems the Central Bank of Iran is more the observer body for private banks rather than for the whole banking system of the country.
Table7. The Impact of Government’s Debt on the State Bank’s Debt Structure
(Billion Rl.)
State Banks’ Debt to the Central Bank Government’s Debt to the State Banks State Bank 1388* 1387* 1386* 1385* 1384* 1388* 1387* 1386* 1385* 1384*
70,575 88,846 59,266 37,840 29,996 Melli 13,852 15,112 3,662 2,143 2,578
24,820 50,910 52,211 6,947 2,675 Sepah 17,362 15,335 12,985 13,210 12,386
-- -- 1,837 2,029 833 Saderat 26,647 13,954 10,546 1,994 1,613
16,431 30,810 12,260 8,231 10,218 Tejarat 266,005 228,317 57,781 50,619 50,581
24,136 33,536 7,818 6,980 1,546 Mellat 27,840 22,201 21,992 16,889 12,307
1,054 2,308 413 501 320 Refah 416 1,622 1,330 1,124 658
-- 200 784 431 501 Post 408 ------
41,976 41,602 37,570 25,503 14,057 Keshavarzi 9,155 5,730 3,941 4,342 ³,019
49,603 47,443 29,329 ³,644 1,172 Maskan 1,864 1,437 879 697 350
2,000 1,125 76 89 150 Toseaa Saderat 2,089 83 261 178 205
26,165 3,601 1,352 1,241 792 Sanaat va Maadan 3,635 3,708 3,575 648 541
56,760 300,381 202,916 94,436 62,260 Tatal 369,273 307,499 116,952 87,886 85,238
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(14/5) 48 114/87 51/7 % of change 20 163 33 3
% Change of 312% 333% 1389 to 1384 **
* Iranian Calendar.
** 1384 and 1389 are the duration ends of second round presidential of S.M.Khatami and first round presidential of M. Ahmadinejad
Source: Omidi Nejad, 1389
Table 7 presents how the government’s debt to SOBs increased during Iranian calendar of 1384-1388 (very closed to 2005-2009) and caused an increase of SOBs debts to the Central Bank. The high debt of government to the state banking system propounds the question that while more than 90% of the state-owned deposit belongs to the individuals (Pourmohammadi 2009), how the government is allowed to withdraw this money in a way that neither it cannot afford to pay it back nor it let the bank’s managements to invest this money in profitable cases for the benefit of depositors? In table 7 the amount of government’s debt to the SOBs and reciprocally the amounts of SOBs’ debt to the Central Bank in 1388 (2009) have consequently been increased for 333% and 312% compared to 1384 (2005). These indispensible increases demonstrate two complete different monetary policies implemented by two different governing manner and objectives.
3.5.5. Worldwide Experiences of Banks Privatization
Overall statistics regarding the bank privatizations for the period of 1985-2003 provided in table 9.3 of Megginson (2005) presents key information about banking privatizations executed by governments around the world. This table includes 291 banks privatized in 58 countries for the amount 142,902.59 $million all through implementing only two sale methods of SIP and asset sale. Generally, the fractions sold by each government could be the result of either government’s intention to how much relinquish its ownership or could be an indication of
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market demand. This is the issue that hardly can be identified from region to region and mainly it is a case by case matter.
Table8. Summary Information on Worldwide Banking Privatization
Reference Bohmer et al. 2003 Megginson 2005
Study 1982-2000 (51)* 1985-2003 (58)* period No. of No. of Variable % Value % Value Transactions Transactions SIP 102 37.9 46.7% 144 50.8 53.3% Asset Sale 168 62.1 53.3% 139 49.2 46.7% Total 270 100 119** 283 100 142.9**
* No. of studied countries
* * $ Billion
Source: Compiled table 4 (Panel A & B) and Appendix1 of Megginson, 2005
The sale methods summary of bank privatization, compiled from the studies of Bohmer et al. (2005) and Megginson (2005) table 8 shows the inclination towards implementing SIP has been gradually increased. More than that, it high lights the importance of two sale methods of SIP and asset sale privatization as the most applicable and practiced sale methods in bank privatization. Therefore, for those policy makers who value the worldwide experiences, it would be an appropriate point to focus on. Furthermore, as a step ahead for looking into some experienced details, there will be an overview within the three categories of developed, developing and transitions countries.
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3.5.5.1. Evidence on Bank Privatization in Developed Countries
Although the banking function, is indispensable in all economies but Megginson (2005) surprisingly indicated that little is known about bank privatization and its effects in developed countries mostly because the bank privatization is a favorable tool for politicians and governments and therefore, the related data are so difficult to obtain and even more opaque than usual for an industry. As such, under the best of circumstances they suffer from lack of transparency in financial reporting. However, among the multinational studies, can be mentioned Verbrugge, Megginson, Owens (1999) who studied the offering terms and share ownership results for 58 unseasoned and 34 seasoned offerings by 65 banks that were fully or partially privatized from 1981 to 1996. They documented moderate performance improvements in OECD countries; ratios proxy for profitability, fee income (non-interest income as fraction of total), and capital adequacy increase significantly, while leverage ratio declines significantly. They also found significantly positive initial returns to IPO investors. On the other hand, they documented large, ongoing state ownership, with very few governments selling majority control of their banks—and even fewer selling their entire ownership stake.
Gleason, McNulty, Pennathur (2005) who examined the short and long-term stock returns to successful bidding firms that participate in the purchase of a financial service firm (including banks) being privatized. They study bidders that are US-based or have stock traded in a US market and examine 86 transactions from 1980 through 2002, though most sales occur between 1995 and 1998. They found that the cumulative abnormal returns for bidding firm shareholders is positive around the date of the announcement, but that this short-run superior performance is not sustainable over longer periods. While the long-run cumulative abnormal returns are (insignificantly) negative. Gleason et al. (2005) found that bank bidders are able to significantly reduce their systematic risks, relative to the home market, following such acquisitions.
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Boehmer et al. (2005) used their comprehensive sample of bank privatizations from 51 countries to examine how political, institutional and economic factors relate to a country’s decision to privatize its state owned banks. They specifically examined whether the determinants of bank privatization are the same in OECD and non-OECD countries. They found that, in non-OECD economies, bank privatization is more likely the lower the quality of the nation’s banking sector, the more right-wing the government is, and the more accountable the government is to its people. None of these factors is significant in developed economies; instead poor fiscal conditions are the most important determinants of bank privatizations in OECD countries.
Portugal is one of the countries showing the similarity with Iran in the case of bank privatization after bank nationalization.
Braz (1999) examined the nationalization of Portugal’s private banking system following a military coup in 1974, as well as the “re-privatization” of these same banks after 1990. He described the (multiple) objectives of the Portuguese government in launching this bank privatization program, and also discusses the primary method of sale (public offer) and offer terms of these divestitures. Drawing on both his analyses and other published works, Braz (1999) showed that:
The productive efficiency of privatized banks increased significantly after divestiture, with assets per worker showing an especially large differential increase.
Privatized banks reduced staff at a significantly more rapid rate than did public banks
Privatized banks experienced significantly more rapid growth in their branch networks than did state banks.
However, despite of similarity in the primary condition of bank privatization between the two countries of Portugal and Iran, no similarity has been seen in staff reducing
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and branch growth but it is also too soon for comparing the productive efficiency after less than two years of bank privatization in Iran.
Otchere and Chan (2003) performed a clinical analysis (case study) of the impact that Commonwealth Bank of Australia’s (CBA’s) privatization had on the bank itself as well as on its domestic rivals. The initial sale of CBA was executed in 1991, and the bank was fully divested in 1996. They find that:
The stock prices of major rival banks react negatively to CBA’s sales, with especially negative reactions to the initial and final sales.
CBA’s long-run stock price performance is significantly positive, and increases steadily as the government’s ownership stake declines.
The financial and operating performance of CBA’s improves significantly after privatization, and surpasses that of its major rivals.
Sapienza (2003) studied the effects of government ownership on bank lending behavior using information on individual loan contracts between Italian banks and customers over the period 1991 to 1995. He employed a matched set of 110,786 company-bank-year observations refer to borrowers from state-owned banks and 55,393 refer borrowers from privately owned banks. He found that borrowers from state-owned banks pay an average of 44 basis points less than do borrowers from private banks. He also showed that the voting pattern of the region where the loan is booked and the party of the state bank's CEO significantly influence the price of loans. These results strongly supported the political view of state bank ownership over the competing social and agency cost views. While, Carletti et al. (2005) explained that since 1990, Italy has gradually privatized its savings banks by separating the banking business from social and cultural activities, by abandoning the “regional principle,” and by enforcing a reduction of the government ownership of banks. This privatization is typically cited as a success story because bank profitability has increased dramatically in recent years, particularly at the largest
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banks. But this higher profitability was achieved at the cost of a lower availability of banking services and loans, and of lower competition in the banking sector. On the other hand, Fiorentino et al. (2009) demonstrated that Italian and German banking systems shared similar characteristics early in the 1990s but have evolved in different directions since then: Italy privatized its publicly-owned banks while Germany has maintained a large share of state-owned savings banks. Contemporaneously, banks in both markets engaged heavily in mergers and acquisition.
In sum, the evidence from developed countries is that bank privatization yields significant performance improvements, though these seem to be smaller and less pervasive than the improvements typically documented in studies of non-financial company privatizations in OECD countries. Also, the weight of empirical evidence suggests that bank privatization is associated with many positive economic outcomes so that many governments have launched large-scale bank privatization programs. But all in all, in taking any lesson or experience it should bear in mind that there is a least compatibility of the market condition and country condition between most of the developed countries and Iran.
3.5.5.2. Evidence on Bank Privatization in Transition Countries
Bonin et al. (2004) described that in the transition economies, the first step in banking sector reform involved creating a system with commercial banking activities carved out of the old Central Bank. Hence, structural segmentation, a proliferation of weak small domestic private banks, and state-ownership of the large banks were the major features of banking sectors in transition economies at the beginning of the 1990s. The second half of the 1990s witnessed a flurry of bank privatizations in these countries.
Megginson (2005) counted two special characters for bank privatization in transition countries. First, it is the transformation from a socialist command economy to a market economy. Second, many banks were sold through voucher privatizations to ensure a smooth shift from state-owned banks to private banks by indicating that
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engineering smooth shifts in the banking sectors of economies that are virtually completely state-owned (transition economics) is far more difficult.
Perotti (1993) alluded that banks in these countries have a strong, perverse incentive to fund large former debtors, although these state-owned enterprises (SOEs) are less efficient and more risky than private firms, because by doing so they gain the potential repayment of previous debts. This inevitably leads to lower productivity of investment and a greater concentration of risk. Furthermore, since privately owned banks feel this incentive just as strongly as state-owned ones, merely privatizing the banking industry will not solve the problem. The incentive to subsidize former debtors is, however, magnified in the all-too-frequent case where the state retains significant influence over the banks or the debtor companies (or both) after they are nominally being privatized. This is a very compatible issue with the case of bank privatization in Iran as the dominant role of the government in privatized banks forces them to remain at the same subsidizing attitude towards the SOEs that they were before privatization.
One of the brief entire histories of bank privatization in transition countries has been given by Fries et al. (2006). They explain that governments and Central Banks in Eastern Europe have implemented several types of policy to transform socialist banking systems into market-oriented ones. Banking systems were liberalized by freeing interest rates and decentralized by transferring commercial banking activities from the Central Bank to state banks. State banks were restructured and privatized and new private banks, both domestic and foreign, were allowed to enter the markets. Moreover, to support arms-length lending relationships between banks and their borrowers and to foster confidence of depositors in banks, legal frameworks were overhauled (including the strengthening of creditor rights) and systems of prudential regulation and supervision were initiated. In broad terms, the main policy instruments to promote the transformation of banking were therefore interest rate liberalization, bank restructuring and privatization, market entry of new banks and fundamental institutional change.
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Bonin et al. (2004) explained that banking sectors in the transition economies of Central and Southeastern Europe were restructured dramatically at the 1990s. Beginning with a financial organization, new governments moved to create modern commercial banking sectors immediately. The first rudimentary step was to divest commercial and retail activities from the portfolios of national banks and to set up new joint stock banks with universal licenses that were fully state-owned initially. Bank privatization was an essential part of the financial reform agendas in these countries.
The rise of foreign bank ownership was at least partly because of the essential failure of domestic ownership resulted of voucher privatization.
Bonin and Wachtel (2002) addressed the impact of foreign bank entry on banking efficiency which created an environment to force the entire banking system to become more efficient, both directly and indirectly. Later, the same result for foreign ownership in bank privatization gained by Bonin, Hasan, Wachtel (2003b) who examined the performance of banks in eleven transition countries and show that majority foreign ownership is associated with improved bank efficiency.
Bonin et al. (2004) concluded three main points as their findings in the bank privatization of transition countries. First they find that the entry of foreign banks, are the most efficient of all types of privatization and improves the performance of banking sectors. They also support that the strategy of privatizing large state-owned banks by selling them to strategic foreign investors after recapitalization and cleaning the balance sheets, espoused by the policy literature for small, open transition countries. Second, the timing of privatization affects bank efficiency. Early- privatized banks are more efficient than later-privatized banks. Third, they find no evidence of any improvements from voucher privatization; for example, early- privatized banks are significantly more profit efficient than voucher-privatized banks during a comparable time period.
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Addition to the aforementioned discussions in common for transition countries, there are some country to country experiences to be considered as the practical lessons or comparable cases in bank privatization.
3.5.5.2.1. Hungary Experience, Recapitalize and Sell to Foreigners
The Hungarian bank privatization episode clearly transformed dramatically the ownership structure of the banking sector in a very short period of time. By 1997, the banking sector in Hungary had been fully restructured and recapitalized, substantially privatized and mostly in foreign hands. IMF (1997) reported that: since 1993 the Hungarian banking sector has undergone a dramatic transformation. The heavy burden of nonperforming loans has largely been eliminated, the majority of the sector has been privatized, largely through strategic foreign investors, and competition in corporate banking activities has strengthened”. Although, Abel et al. (2002) stated that the policy at the time also did not inspire outside investors, primarily foreign ones to invest in an existing Hungarian bank. Instead foreign banks preferred to set-up shop in Hungary from scratch (so-called “Greenfield” financial institutions). The entry of foreign banks, early in the process and before the political change facilitated the privatization to foreigners of the large, restructured Hungarian banks. By all accounts, the banking industry in Hungary, which had been the weakest in the region as late as 1995, became the strongest in 2005. In sum, the experience of Hungary reveals that recapitalization is a necessary condition for a successful transfer of governance to an external owner. Weak banks must be restructured and endowed properly before a sale is considered (Bonin et al. 2004). The lesson from the Hungary’s experience identified by Megginson (2005) is that the continual recapitalizations of Hungarian banks were ultimately successful because privatization to an independent, usually foreign owner followed rapidly leaving Hungary with the strongest banking sector in the
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region. By restructuring the banks, the Hungarian government was able to attract strategic foreign investors who had an incentive to promote lending on a commercial basis thus precluding the need for future bailouts.
3.5.5.2.2. Poland Experience, Government Directed Development and Fear of Foreigners
The process of bank privatization in Poland met with mixed success in creating independent banks. Aberbanell and Bonin (1997) stated that over time, the government’s privatization policy was inconsistent due partly to multiple objectives with changing priorities. The mix of tender and IPO along with the willingness to tolerate foreign purchase of bank shares changed throughout the period as the weights placed on different goals changed. The result was a process directed by the state with continuing government involvement in the governance of individual banks and the development of the banking sector. To Aberbanell and Bonin (1997), the weaknesses of the Polish experience with bank privatization were in: Multiple policy objectives coupled with changing political Problematic pricing Underestimating the absorption capacity of the domestic market Undeveloped transactional infrastructure of the domestic equity market for high capitalization values of banks to be privatized. Not enough anticipation of institutional problems before they arise. Aberbanell and Bonin (1997) also resulted that although attracting a foreign strategic investor is the best way to promote independent governance and rapid development of banking efficiency, political resistance to foreign control can be substantial. Hence, protectionism may be a convenient veil for a government that wishes to continue its direct involvement in the banking sector.
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3.5.5.2.3. Czech Republic Experience, State and Insider Control Persist
As Mejsrike (2003) mentioned, in the first half of the 1990s policymakers prevented a government restructuring of SOEs before privatization and in second half foreign participation was encouraged and could have caused a huge amount of FDI flowed into the country and finally the most distinct one was implementing the variety of selling technique as a whole. The privatization process included restitution, small privatization through auctioning, foreign participation, coupon or mass privatization for medium and large SOEs combined with other methods of directly negotiated sales, public auctions and tender. Mejstrike (2003) concluded that such a variety of privatization techniques except coupon model provided flexibility, but at the same time, has concentrated much decision-making power in the hands of government’s project evaluators while in each case mangers of SOEs or the bidders were supposed to prepare their own privatization plan, which was then reviewed by the Founder Ministry. Bank restructuring predated privatization in the Czech Republic but the large banks remained in state hands. At the start point however, neither banks nor enterprises were restructured significantly. As a result of continuing government dominance of bank governance, the Czech banking system was identified as one of the weakest among the transition countries in 2005. Megginson (2005) submitted that voucher privatization in Czech Republic resulted in interlocking ownership arrangements among banks and between banks and their clients of the banks leading to less transparency of financial arrangements. Non-transparency inhibits competition and hinders the transfer of control to an independent owner. Therefore, foreign banks, first scorned by the Czech government, have been hesitant to consider taking substantial ownership stakes in large Czech banks due to non-transparencies and the continuing relationships between these banks and their largely non restructured clients.
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3.5.5.2.4. Estonia Experience, Buyer Matters
Legal grounds for privatization of large companies in Estonia were established in 1992 and till 2002 more than 90% of its industrial and manufacturing were privatized by adopting the East German model. The banking sector has been consolidated and is largely foreign-owned. As a result of this early and determined commitment to privatization, the private sector generated some 80% of GDP in 1999, one of the highest proportions in Eastern Europe. As Nellis (1996) reported, the prime goal in selling method included banking sector, was to find “real owners” capable of running a durable, productive firm. Purchase offers were thus judged not only on price, but also on the quality of business plans submitted, particularly with regard to expected investment and employment creation. Winning bidders negotiated contracts formalizing their commitment. No special concessions were made to workers and managers in the affected firms, but they could and often did submit a bid and a business plan and they have won the competition in some cases. Nellis (1996) concluded that in scope and pace, Estonian privatization has been a success. No privatized SOE or SOB has failed, and the privatization agency reports that most divested firms are expanding their employment.
3.5.5.2.5. Russia Experience, Rapid but not Perfect
Vernikov (2007) stated that state withdrawal was not motivated by poor asset quality of state-owned banks or banking crises. Instead, state withdrawal was attained de facto through dilution of state-owned stakes, asset-stripping, malicious bankruptcies, and other shady methods. Indeed, Russian banking crises in recent years have generally been precipitated by deteriorating liquidity situations or default on the part of the state itself. While the majority of foreign subsidiaries in Russia belong to private foreign banks, public-sector banks of other nations and international financial institutions are also shareholders. In order to arrive at a more consistent breakdown by form of ownership, the market shares of subsidiaries of foreign public-sector banks 246
and international financial institutions to the share of the local public sector should also be taken into account. Public sector banks often form pyramid-like vertical holding structures, whereby the state entity controls the bank at the top, which in its turn controls several (nominally independent and private) banks below it. For example, VTB (the Russia’s second-largest bank, government-owned) owns nine banks in eight countries in Europe and CIS countries. Several of those banks, in turn, have subsidiaries in Russia. The law on privatization provides for contribution of state assets into equity of joint- stock banks as an accepted modality of privatization, delegated to the authority of the respective ministry, regional, or municipal body. The Russian state expects private banks to demonstrate enthusiasm and involvement in solving socio-economic problems at the macro level. Pursuit of profit maximization per se is deemed as socially unenlightened. Thus, bureaucrats push private banks to allocate funds along centrally-approved guidelines (including the much-touted national priority projects to improve healthcare, education, agriculture, and housing). When there is a discrepancy between non-economic motivation and normal market motivation, the institutional network can force banks to deviate from their implicit mandate to operate as efficient allocators of resources to retain the loyalty of the authorities. Moreover, distrust on the part of state regarding the willingness of independent private-sector actors to act in accord with political guidelines hinder privatization of core banks and are used to justify restrictions against foreign investment in the banking sector. In Russia, the public sector and national private sector roughly hold equal market shares. Russia’s share of foreign-controlled banks (about 10%) is lower than for any European transition economy. The withdrawal of the Russian State from commercial banking sector has been inconsistent and limited in scope. Core banks were not subject to privatization. Vernikove (2007) maintained that institutions imported to regulate finance and banking clash with traditional norms and in most cases cannot beat the competition. This creates a bad equilibrium between old and new institutions that favors non-market patterns of centralized allocation and redistribution and 247
suppression of competition. This bad equilibrium trap is typical of an economy that has only managed to implement partial reforms. On the whole, as Bonin et al. (2004) concluded, the main lessons and results from the bank privatization in transition countries are as: Inefficiency of government ownership of banks Foreign banks entry as the most efficient of all banks types Selling large state-owned banks to strategic foreign investors Recapitalization and cleaning the balance sheets of small banks before privatization Timing matters. Early-privatized banks are more efficient. No evidence of any improvements from voucher privatization
3.5.5.3. Evidence on Bank Privatization in Developing Countries
Different positions towards SOB privatization have been taken by the governments. Some have resisted, others have renationalized previously privatized banks, and many have privatized using approaches that failed to yield the full gains from privatization (Clarke and Cull, 2002).
In general view, Boubakri, Cosset, Fischer, Guedhami (2005) through their multinational study of post-performance of 81 privatized banks found that:
Privatization alone does not significantly impact profitability or operating efficiency.
Ownership type and industry concentration significantly impacts risk taking behavior by privatized banks, with banks controlled by industrial groups taking the highest risk exposure, followed by locally controlled banks and with foreign owned banks taking the least exposure.
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Foreign owned banks have lower net interest margins than domestic owned banks, and foreign ownership makes a significantly greater contribution to a divested bank’s economic efficiency.
Otchere (2005) did the same performance analysis as well as assessment of stock price performance for 21 privatized banks and resulted that privatization announcements elicit significantly negative stock price reactions from rival banks, which are more negative the larger the state ownership fraction that is divested while, Beck, Cull and Jerom (2005) documented a significantly positive impact from privatization, even in a macroeconomic and regulatory environment that was inhospitable to financial intermediation. However, the regional overview of SOB privatization through the same classification provided in chapter one (done for the general SOE privatization) will be described as the following.
3.5.5.3.1. Latin America Experiences
Among the studies of bank privatization in emerging market of developing countries in Latin America, Crystal et al. (2002) suggested that private foreign and private domestic banks did not systematically differ from each other in condition and performance and PBs regardless of ownership, were generally healthier than state-owned banks. Their findings were also consistent with Goldberg et al. (2000) that the potential for foreign ownership, at least from globally active and healthy parent banks, to contribute to sounder and more stable banking systems in emerging markets. By examining the political economy aspects of bank privatization in Argentine, Clarke and Cull (2002) found that: Poorly performing banks are more likely to be privatized than those performing well. Overstaffing reduces the probability of privatization as the post-sale staff cuts will be too politically painful. Larger banks are less likely than smaller banks to be privatized.
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Higher levels of provincial unemployment and higher shares of public employees reduce the likelihood of privatization. Both economic and political factors impact the privatization decision for individual banks, but political buyoffs seemed especially important factors. Brock (2000) submitted that the first bank privatization programs in Chile ended in failure after the Debt Crisis broke out in 1982, when the Central Bank was forced to close or renationalize most of the privatized banks. The second program began in 1985 and employed mostly public share offerings targeted at small investors and offered on very favorable terms. The difficulties faced in re-capitalizing and then re-privatizing the national banks and other financial institutions, though these efforts were ultimately far more successful than those in other Latin American countries. Mexico’s experience has been the most controversial bank privatization in Latin America. The same as Chile, Its first program was failed despite of clear objectives and the adoption of transparent and credible procedures as the basis for the effectiveness of this program. However, Unal and Navarro (1999) saw them far from being sufficient to ensure a safe and a sound financial system and argued that the root cause for failure was not the technical process of privatization but the lack of previously enhanced legal and regulatory framework. Although they believe that the major lesson from the Mexican experience was that designing an effective privatization program is not sufficient. This endeavor needs to be supported by an equally well-designed legal and regulatory bank supervision framework. Otherwise, the ultimate downside risk is the possibility of a need to bailout the entire private banking system by the government. Another lesson from Mexico’s experience provided by Goldberg et al. (2000) who suggested that bank health, and not ownership per se, has been the critical element in the growth, volatility, and cyclicality of bank credit. However, in the picture of second program success of Mexico’s bank privatization, the role
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of foreign ownership is highlighted as the foreign banks controlled over 60% of the banking system (Haber, 2005 and Tornell, 2003).
3.5.5.3.2. Asia Experiences
India as one of the fast growing economy in the world has been known as the follower of gradual privatization. The Indian banking system is characterized by a large number of banks with mixed ownership and the partial privatization program in India, undertaken as part of the overall process of financial sector reforms, since the early 1990s, was aimed at improving the performance of state-owned banks. There are two different founding for two different section of time as the result of bank privatization in this country. Bhattacharya et al. (1997) for the early stages (1986–1991) of liberalization resulted that publicly owned banks are the most efficient and privately owned banks the least efficient at delivering financial services to customers. Also foreign-owned banks increase market share significantly during this period, primarily at the expense of state banks. Then, Gupta et al. (2011) reported that in India the objectives of the liberalization agenda were both to increase the operational efficiency of banks at the institution level and to improve the efficacy of resource allocation economy-wide. The evidences confirmed that financial liberalization and increased entry of private banks increased competition and significantly improved the efficiency and profitability of public banks to the point where they could be comparable to private banks. However, in developing countries, where alternative channels of financing may be limited, government ownership of banks, combined with high fiscal deficits, may limit the gains from financial liberalization. Turkey is another fast growing economy in Asia with its especial mixed public, private, domestic, and foreign bank ownership. Marois (2006) in explaining the history of Turkey’s banking system indicated that the 1980s saw the liquidation of a few private banks, but no nationalization per se, and the continued presence of important and long-held state banks. In the 1990s, privatization to domestic family industrial groups was initiated but at a very 251
slow pace. The 2000 and 2001 crises proved to be an important opportunity to accelerate state restructuring, privatization, and foreign capital entry. The Turkish state, nonetheless, has retained a few large and important state banks due to a mix of structural limitations and domestic social resistance. However, under the auspices of a variety of coalitional governments and a majority government currently in power, these remaining state banks have been re- structured to operate as if they were private, profit seeking operations. More to the point, they have been or are being readied for sell-off despite of considerable yearly increase in their profit. There are many distinguished cases to show the consistent supportive attitudes of Turkey’s government towards the private sector in banking system. For instance, Sümerbank was Turkey’s first significant bank privatization in 1995, sold to the domestic group and subsequently failed following the 2000-01 crises, was taken over by the state, merged with five other banks, and was re-privatized in 2002 to another domestically-owned bank. Or Vakifbank has been through several failed attempts to privatize since the late-1990s and has only been partially privatized (25%) in 2005. Turkey as a neighboring country of Iran could give so many lessons in privatization specifically in banking industry. The most important one is to recognize that how far the government of Turkey has consistently been serious to maximize the role of private sector in determining the political and economic priorities of the state without fearing of losing its authority in governorship. As Marois (2006) stated, Iranian government could recognized that now the meanings of ownership and purposes of banking have shifted such that they are no longer the same as they were even twenty years ago. This is especially evident in Turkey where, regardless of ownership, all banks have moved towards adopting an increasingly neoliberal logic of accumulation and this has occurred amidst capital account liberalization, Central Bank independence, and ongoing processes seeking to institutionalize neoliberal restructuring, or the formal separation of the political and economic moments, which has deepened the capitalist world market. 252
3.5.5.3.3. Africa Experiences
Generally, the major constraint faced in trying to address bank privatization issues in Africa is the lack of adequate data on the quantitative impact of privatization. Several conducted studies about developing countries, include less emphasis on Africa. As Beck et al. (2009) mentioned, African financial systems are among the smallest across the globe, both in absolute terms and relative to economic activity. Small size is connected to low productivity and skill shortages, and prevents banks from exploiting scale economies. Africa’s financial systems are characterized by very limited outreach, with less than one in five households having access to any formal banking service as; savings, payments, or credit. Banking is also very expensive but very profitable. Indeed, subsidiaries of foreign banks in Sub-Saharan Africa have higher returns on assets and equity than subsidiaries of the same banks in other regions of the world. This trend will most likely be even stronger in the years to come, as global investors’ risk appetite is fading. This is partly because of very high risks banking and partly the lack of competition. This lack of competition in turn, is again related to the lack of scale in most African financial systems, which limits the number of financial institutions that an economy can sustain. Beck et al. (2009) argued that the large share of foreign- owned banks across Africa has brought stability over the past years, but also exposes the region to additional contagion risk. Any crisis could possibly be transmitted to Sub-Saharan Africa if financial distress among parent foreign banks in Western Europe leads either to a withdrawal of capital or to a calling in of loans made to their African subsidiaries. In North Africa, Omran (2003) concluded insignificant changes resulting from bank privatization in Egypt, though some profitability and liquidity measures decline significantly after 1999 due to worsening macroeconomic conditions. Also, banks with higher private ownership are associated with superior performance. Trabelsi (2010) showed a positive association between external
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administrators and performance of privatized banks in Tunisia and emphasized that a high number of administrators results a negative effect on performance. The results also reveal that managers lack control while the board of directors seems to exert a lot of power. His results also revealed a negative association between the presence of a group of dominant shareholders and performance, a phenomenon which might be explained in terms of private appropriation of benefits. Beck et al. (2005) examined nine Nigerian banks that were completely privatized during 1990–2001 and document a significantly positive impact from privatization, even in a macroeconomic and regulatory environment inhospitable to financial intermediation. Privatization helps close the very wide gap between the performance of state owned banks and private banks in Nigeria, though the performance of divested firms never surpasses that of private banks. Clarke et al. (2007) mentioned the privatization of Uganda Commercial Bank as a successful example because of; fully relinquishing of government’s control, cleaning the bank’s portfolio before sale, allowance of foreign banks to bid, and sale to strategic investor. This was completely opposite to the condition in 1996-97 when the governments, unions and local financial communities in Uganda all raised concerns that selling major state banks to foreign institutions would lead to the closure of smaller and less profitable rural branches and deprive many people of basic banking services (Harsch 2000). It clears that any unbiased observation of global capital market that may results rational flexibility in privatization policy, not only provides better solution, but even establishes more stability and success conditions. In fact, the view change towards welcoming the foreign investor was not only limited to Uganda or Tanzania and even Beck et al. (2009) concluded that in many African countries, privatization was to foreign banks, since there were no domestic resources and skills. While in the mid-1990s less than a quarter of banking systems were dominated by foreign-owned banks and many countries still had predominantly government-owned banking systems, by 2005, more 254
than half of the region’s countries had a banking market with either a dominant or a significant share of foreign-owned financial institutions.
3.5.5.3.4. China Experience
In chapter four it was discussed the similarities of the idea of “Justice Shares Distribution” as a core concept of privatization in Iran’s action Plan with the voucher privatization as a well known but failed method in transition countries. Yet, as the Chinese model of privatization is the only model that very rarely but officially has been claimed to be copied for privatization in Iran therefore, it is necessary to separately look at the details of bank privatization in China to found out the probable existed similarities between the general conditions and the privatization implementation and positives and negatives. China’s SOBs did not begin to be privatized until 2005, but joint-equity banks were in existence as early as 1986. Barth (2009) described that the joint-equity banks with different ownership structure than SOBs but similar to the privatized banks with government’s control through major shareholdings of SOEs. The main reason claimed for establishment of joint-equity was to increase competition while, they were directly controlled by the government. By the end of 2004, five of the eleven joint-equity banks were listed on China’s stock exchanges with less than 50% of the government’s controlling ratio. Barth (2009) did not report much difference between the state-owned banks and the joint-equity banks as regards regulation and supervision. All bank interest rates in China must be within a range that is designated by the People’s Bank of China, although this range has been substantially broadened of late. Furthermore, although founded in accordance with commercial banking law, currently the ratios of both the state-owned and the joint-equity banks may be less than 8%. The only regulatory difference between the state- owned and joint-equity banks relates to credit control. Before 1998, the Central Bank of China controlled the credit of the state-owned banks by 255
setting mandatory credit quotas, which did not apply to joint-equity banks. However, the job stability is much higher in SOBs and the Central Committee of the Communist Party of China nominates the governors of the SOBs, whereas the governors of the joint-equity banks are nominated by the board of directors. Although their level of prudence is incomparable with that of the joint-equity banks, the SOBs have been carrying out fairly efficient reforms and are becoming more prudent as a result. Moshirian, Chan, Li (2005) tested whether bank privatization creates a stronger banking competitor by examining the impact of privatization announcement of Bank of China on the stock prices of 23 bank and non- bank financial institutions in Hong Kong and mainland China. The stocks of Hong Kong financial institutions (particularly non-bank institutions) generally react significantly negatively to announcements, implying that investors believe that the bank will become a stronger competitor. Mainland banks and non-bank financial institutions react positively, probably interpreting the privatization announcement as a signal that the Chinese government will continue to de- regulate and reform China’s financial system. It is the general belief that bank reform through privatization, brought major changes to these financial institutions. In this direction Brandt, Li, Roberts (2005) submitted the brief comparison scope of banking system in China pre and post- privatization as complied in table 9.
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Table9. Comparison of Pre and Post Privatization Banking System in China
Pre-privatization condition Post-privatization condition
No incentives and pre-determined payment, Initiation of bonus system in the early 1990s tied
independent of the performance. up to the bank’s performance
Promotion of many better-educated and more No formal training of the bank’s mangers, and competent employees to branch managers that lacked the skills either to screen loan applicants improved screening of loan applications and or monitor firms after loans were made. increased loan repayment rates through better project selection.
Enforcement of political power to influence Township-owned firms, as well as other ownership local bank’s lending decision through township types, were required to provide hard collateral leaders’ role in appointing branch managers.
Budget constraint of government-owned firms hardened by decentralizing a significant part of the Loans to government-owned firms were soft. lending rights from township bank branches to the upper (or county) level.
Source: Brandt, Li and Roberts, 2005 Kikeri and Burman (2005) showed that only in 2004-05, 70% of what China gained in privatization was from minority share sale of its five biggest banks and insurance companies to the foreigners. For ending the experience overview of developing countries, it is worth mentioning the summary of Clarke and Cull (2005) results as: Bank performance will improve after privatization. Performance gains will be smaller when the government retains shares in the privatized bank.
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Sales to strategic investors, which result in concentrated ownership, will lead to greater performance gains, than share-issue privatizations, which result in dispersed ownership. Performance gains will be greater when foreign ownership is permitted. But poor performance cannot be solely ascribed to restrictions on foreign ownership. Privatization will be more successful in competitive banking sectors. Bank privatization improves profitability, portfolio quality, and operating efficiency, when it is done correctly. Because state banks have many, often competing objectives (for example, to extend credit to underserved market segments) and they often lend for political reasons. SOBs are often less efficient than similar PBs. But efficiency is not the only justification for state ownership. If SOBs successfully correct serious market failures, state ownership might improve social welfare even when SOBs are less efficient than PBs.
3.5.6. Banks Privatization in Iran
The major objectives of privatizing the Iranian state owned banks like any other privatizing sector has been defined in Article 44 as the following:
Accelerating the national economical growth Public ownership development to provide social justice Upgrading the performance of economical institutions and optimizing the resources including human, technical and material. Exceeding the competitiveness in the national economy Increasing the share of private and cooperative sector in the national economy Reducing the financial and managerial involvement of government through incumbency in economical activities Increasing the public employment level
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Encouraging the people to saving and investment and improvement of house holdings income
For the purpose of achieving the aforementioned objectives, the privatization of state –owned banks and insurance companies were of the most important missions of the Ministry of Economic Affairs and Finance and IPO. As the mission’s execution, the deputy minister, Pourmohammadi (2009) announced that the package compilation for privatizing the state owned banks has finalized and ready to be implemented meanwhile, 70% of 180,000 employees in the state banking system are high school educated, only 3% of capital in the state banking system belongs to the government and the rest is the people’s money, and there should be allocated 1800 trillion Rl. for improving the capital structure and capital equity of those banks that are listed to be privatized. Only four (Mellat, Tejarat, Saderat and Post Bank) of eleven state owned banks were selected to be privatized.
3.5.6.1. Mellat Bank Privatization
During the 90 years history of banking in Iran, Mellat Bank was the first state owned bank being privatized on 18 February, 2008. The bank was established in 1979, with 5.33billion Rl. capital as the result of merging 11 banks by the Council of Islamic Revolution. The dictated procedure of privatization was to first offer 5% of the total shares in TSE to explore the share price. Despite a very vast and lengthy negotiation with different probable buyers, at the time of share offering in TSE, the capital market did not welcome the offering because of many ambiguities in its financial reports. The hesitation in the market was so much that the bidding price was very below the 1,000 Rl. (share par value) and the total demand was less than 65% of total offered shares. Not reaching the latter percentage was a legal compulsion for TSE to remove the offer from the trading board for that day and cancel the bid. Clearly, such an event could become a disaster for the IPO and the whole future procedure of bank privatization at the next steps. Therefore, at the last minutes of TSE’s operation time, an investment company affiliated by Mellat Bank (The Pension Fund of Mellat Bank’s staffs), intervened the market and raised the price to 1,050 Rl. and increased the amount of demand to 52% of total offered shares and thanks to the governmental 259
management of TSE that illegally registered that transaction and ended the mission well. This imposed result could not be better achieved because of so many ambiguities in the proposed financial reports by the board of director of Mellat Bank. As, there was a considerable lack of transparency about the capital equity, amount reserves for bad loans, amount reserves for service termination of the staffs and the re-evaluation of fixed assets in abroad. Knowing that the book value is: “the total value of fixed assets, investments, current assets and other assets” minus “all the liabilities” then, ignoring the book value by the market in pricing the share meant that, the clearness in evaluation of total assets or total liabilities or both was not accepted by the market. It is also important to note that any false in any of the aforementioned issues were directly under the responsibility of the board of directors of Mellat Bank, involved auditors and, the managing director of Stock Exchange Organization. Of course The IPO has no accountability for any inconvenient of the firm’s financial reports while offering their shares in TSE.
Only by offering 6% of the total shares in TSE, the government appointed managing director of Mellat Bank, Divandari (2009) in his press conference announced that from now on, the privatization of the bank has been completed. In his calculation, allocation of 40% to the Justice Shares even if is not happened at the time and 5% future offering to the bank’s staff and 5% offered shares in TSE, results the total of 51% of private ownership and the bank could operate as a private bank. The ownership structure reported in the bank’s annual report to the general assembly in 2010 and the data presented in the Central Bank website are consequently shown as % of ownership (1) and (2) in table 10.
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Table10. Ownership Structure of Mellat Bank after Privatization
Shareholder % of Ownership (1) % of Ownership (2)
Government 24.00 19.99
Allocated Justice Shares 30.00 19.19
Semi-government institutes 34.27 19.43
Diffused owners and non offered shares 9.73 41.39
Disregarding the illogical difference between the two reports it suffices to note that the sum of three ownership portions of government, allocated Justice Shares and, semi-governments institutes demonstrate the governmental management control in the banks. Additionally, as the time passes the Justice Shares’ portion declines from 2010 to 2011 while, due to its successive allocations to the provincial investment companies the mentioned portion should be fixed or face an ascending trend. Consequently, the present documented amount of the Justice Shares allocation indicates that the aforesaid announcement of Mellat bank as a privatized bank by its managing director was not correct and it is very questionable how it has been able to operate as a private bank under the eventual observation of Central Bank?
3.5.6.2. Tejarat Bank Privatization
The share offering of Mellat Bank as the first experience enforced the IPO to be more precise and conservative in the timing of following share offerings and much more than before to rely on the semi-government institutions for managing the success of the bids in TSE.
Tejarat Bank was the second SOB to be privatized. It was established as the result of merging 12 private banks in1979 with 39 billion Rl. of registered capital. In May17, 2009, the 6% of the total shares (13 billion shares) was offered in TSE. According to 261
the lessons learned from Mellat Bank’s experience, in a short period of time the offered shares were sold for 1200Rl. per share and form July 2009 to May 2010, it was reported that three more 5% blocks, were sold through TSE to three semi- government organizations (Shasta, Astan-e Ghods and National Investment Company). The mentioned three transactions caused a noticeable sequential increase of the share price as 1,732 Rl., 2,110 Rl. and 2,783 Rl. The ownership structure demonstrated in the website of TSE as “% ownership (1)”, and in the website of Central Bank as “% ownership (2)” both in January 2011, are shown in table below.
Table11. Ownership Structure of Tejarat Bank after Privatization
Shareholder % of Ownership (1) % of Ownership (2)
Government 18.22 23.43
IPO 5.00 5.00
Allocated Justice Shares 30.20 40.20
Semi-government institutes 5.29 3.10
Diffused owners and non offered shares 28.27 41.29
Surprisingly, addition to the glaring difference in two official reports of ownership structure, there is neither an indication of the ownership resulted of mentioned transactions of block share offering nor the owners whose representatives have occupied three of five seats in the bank’s board of director at the time of study.
3.5.6.3. Saderat Bank Privatization
In 1953, Mohammadali Mofarah, an outstanding Iranian entrepreneur, invited a group of his colleagues for establishment of a bank. He argued that only 11% of market capital has been deposited in the present banking system and the rest is mostly kept 262
hidden in people’s small chests or traditionally inside their pillows (Saderat Bank Website, 2010). He believed that honest management and public trust attraction will definitely guarantee the success of the proposed bank and also, the flowing of absorbed 89% of the market’s capital through the banking system will cause a tremendous positive change in the country’s economy. The group, established the Saderat Bank as the first private costumer oriented bank with 20 million Rl. registered capital and a year later in1954, they appointed Mofarah as the managing director who did undertake this responsibility for the later 23 years. For the first time under his management, Iranian banking system benefited of publicizing the mottos such as “Customer is always right”, “Customer is a king” or “Saderat bank is at the people’s service” and indeed, rebuilt a consolidated public’s trust towards the banking system of the country. In May 1979, The Parliament of Islamic Republic of Iran approved to nationalize the Saderat bank and in 1980, all the branches in each province became change into Provincial Saderat bank with 100% ownership of the Saderat bank itself.
Saderat bank was the third state owned bank to be privatized when it had the most expanded branch network inside (3300 branches) and outside (25 branches) of the country addition to the share holding of four foreign banks in Tashkent, Bahrain, London and Afghanistan. It was the first, if not the only, state owned enterprise that apparently, its management confronted with the subject of its privatization with a compiled plan of action and openly did the marketing task and arranged many introductory meetings inside and outside the country and of course, were dismissed from their position after the first phase of bank’s privatization.
In June 9, 2009, the price share of Saderat bank was explored in TSE as 1001Rl. (one Rial more than the share par value). The first phase of offering the 6% of the total shares was done in 6 minutes. In 2010, the board of director reported the performance of 2009 with the latest shareholders combination to the yearly general assembly of fiscal year-2009 shown in table 12 as “% of ownership (1)” compared with the
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demonstrated ownership structure in the Central Bank website in January 2011, shown in table below as “% of ownership (2)”.
Table12. Ownership Structure of Saderat Bank after Privatization
Shareholders % of Ownership (1) % of Ownership (2) Government 38.12 36.84 Justice Shares 40.20 30.00 IPO 0.00 5.00 Diffused Owners and non offered shares 21.68 28.16
Once more and the same as the case of Mellat bank, the descending (instead of ascending) trend shown for the amount of Justice Shares in ownership combination reveals the false public reporting, serious ambiguity in being privatized at the time of its announcement, the silence of the experts which does not necessarily imply assent and, the passive position of the Central Bank as regard all this behaviors and results.
At the time of starting the privatization procedure for Saderat bank the re-evaluation of 3300 branches in all over the country (excluding 25 branches outside the country) was not accurate. Such a huge fixed asset of the banks could be a good reason for the government to implement a ceding policy with the least ceding to the diffused owners and no ceding to semi-government institutes neither as bartering nor as selling the shares.
3.5.6.4. Post Bank Privatization
Post Bank was the last SOB in the privatization list of IPO. The 5% share offering date announced as November 3, 2010, and despite of TSE’s regulation for offering the shares of any SOE in the process of privatization, only one page, as a financial report of the Post Bank appeared in the related website of Tehran Stock Exchange “CODAL”, after the working hour of November 2, 2010. The amount of 2300Rl. was the explored share price of the Post Bank as the 7th bank admitted in Tehran Stock Exchange. Its ratio of Price per Earning (P/E) was 7 while the average ratio for banks 264
group was 6.7 and the privatization of Post Bank raised the share of the banks group in the TSE from 15,000 to 17.600 trillion Rl. and closed the country file of SOB privatization.
Table13. Ownership Structure of Post Bank after Privatization
Shareholders % of ownership Government 64.82 Allocated Justice Shares 14.03 Preferred Shares (sold to the individual staff) 5.00 Diffused Owners and non offered shares 16.15
Coincident with the first block share offering of the bank, its board member and deputy managing director, Khodarahmi (2010) in his press interview in November 3, 2010 explained the future plan and policy of the bank’s management for the next operation year, as an indication of his confidence for the sustained governmental management. Actually, the following demonstrated ownership structure of the bank by Central Bank in January 2011 shown in table 12 plus no other accessible official report did confirm such a confidence.
3.5.7. The Evidences Embraced in Privatized Iranian Banks
The above explained details of four Iranian SOBs privatization contain some underlined issues. One of the critical and common points in all privatized banks is the major government controlling shares in the privatized banks. Normally, at the first step, it results the appointment of the board members and managing director of these banks by the government and the privatized banks be entangled again in governmental management. As Forror et al. (2004) mentioned the change of ownership from government to private sector should involve new management with different perceptions, objectives and potential. Then, shifting from governmental management to private one will cause many structural changes in mission, goals, values, capital structure and human resource structure. There is no reported indication or evidence for any of these structural changes since 2008. Forror et al. (2004) also referred to organizational changes due to the change of ownership, with the assumption of coincident 265
change in the management specifically in profitability, efficiency, productivity, public confidence and employee empowerment and input to process improvements. Yet, the effects study in these areas definitely needs a comprehensive and transparent data and information while they were not accessible at the time of providing this thesis.
Different reports on the ownership structure of the banks with indispensible gap within, conducts the health and transparency of the share ceding procedure under the serious question.
The total ownership of the individuals and private legal entities are so diffused that have not been able to take even one seat in the board of directors and necessarily cannot have any influential voting right in any case. This is consistent with the finding of Bonin and Watchel (1999) that public offerings of equity in the banks lead to diffuse ownership that favors entrenched management. As a result, the government will rule the banks as de facto management.
Back to the report of Pourmohammadi (2009) and the point he raised about the uneducated over staff of the banking system, there has been no qualitative or quantitative report or evidence embraced any organizational re-structuring prior or during or post privatization including educating staff of privatized banks with the new modern banking concepts and technology (excluding the regular training). More than all, it seems that the government did not avoid of any violation of laws where ever it was needed to do so. A few of them were softly discussed in some independent mass media such as Sarmayeh Daily Newspaper (2009) that soon after was taken into custody as a warning lesson for the others. The few following examples may be considered as the stated violation of laws by the government during the procedure of bank privatization.
In Article 4 of the Trusty Reports (Amin-Nameh) of the privatized banks that should be presented to the public through TSE prior to the first share offering, it has been strictly mentioned that the government will support and compensate any loss arising from the claims against the privatized banks prior to the time of their privatization. This commitment has been discussed as a violation of law by the government. As, such a warranted payment should be first approved by the parliament within the yearly budget (Sarmayeh Daily Newspaper, 2009) 266
and it is unknown when such a claim may be arisen and whether its compensation will be approved by the parliament or not?
In Article 5 of the same Trusty Reports the government has under taken to compensate any legal liabilities of the privatized banks prior to the privatization that may be disclosed after privatization. This has been recognized as another violation of law by the government for the same reason explained about Article 4 before this.
In Article 7 of the presented Trusty Reports of the privatized banks to TSE, it is revealed that the Central Bank has paid the cash as a credit line to the privatizing banks with no interest to replace the government’s debt to these banks. By this action, the Central Bank has done two law violations. First, the Central Bank is not allowed to provide any credit line to the banks that are in the ceding procedure. Second, any similar provided credit line by the Central Bank, depends on its kind, should include an interest rate of 14-34%.
Finally, as the most capsulated issue, it should be notify that the bank privatization, particularly in developing country, has a direct relation with the political stability of the governments. Clarke and Cull (2002) argued that politicians choose to privatize when the political benefits of privatization exceed the political costs. Less stable governments may be unwilling or unable to accept the political risk involved in a large privatization. Bortolotti and Pinotti (2003) supported this conjecture with the finding that privatization is more likely in more stable regimes. The findings of these groups of studies are completely consistent with the reasons of the low rate share ceding to private sector in privatized banks and reveals the dual role that the government had to play. In one hand, there was a national obligation to implement the process of privatization, no matter in what shape and quality. On the other hand, like in any authoritarian regime that indebted its existence to its economic power, there was no intention of transfer economic power to the private sector by shifting the control of privatized fundamental SOEs, including the banks.
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3.5.8. Comparison of Worldwide Examples with Implemented Bank Privatization Model in Iran
So far, many example of bank privatization around the world along with the case of Iran has been overviewed mainly with the target of finding what lessons could be derived from the worldwide experiences for the next related steps in Iranian banking system. It was also assumed important to find out any similarity between the privatization models implemented in Iran and the others to get the chance of predicting the results or preventing the consequences emanated of similar model implementation.
As far as the privatization model of Iran partly becomes closer to the voucher or mass privatization (discussed before in this chapter), it would have gone far from the Chinese model, claimed to be copied in Iran`s privatization by Kord-e Zanganeh (2009). So, it is worth to have a deductive glance on how far or close is the bank privatization model of Iran to any worldwide studied experiences in this thesis?
Developed countries: Developed countries can easily be put aside, as no similarity within their basics and fundaments with a country like Iran. From the perspective of developed countries, a determined government to implement a pervasive privatization is type of the government that does the full privatization by the doubtless transparent methods in a deep and wide liberalized capital market through high credible experts and consultants in the condition that is well equipped with improved regulations and economical infrastructures. However, it has been always an opportunity for developing countries like Iran to realize how far they are from this conditions and how wide they can learn from the practiced experiences of developed countries.
Latin American countries: One of the main characteristics of the bank privatization in Latin American countries is their welcoming to foreign investors in their privatized banks’ ownership by caring about its results mainly on the matter of capital injection and upgrading the banking related technology. The other, can be considered the interest in expanding the interrelation affairs with the international financial system through promoting the activation of foreign banks. Even the syndrome of none of these two characteristics could be seen in the 268
present environment of Iran. Such a dissimilarity is not only consistent in the comparison with the Latin American countries but can be extended to the wide range of the countries around the world that are not internationally isolated in financial affairs and their capital market is open to the both domestic and foreign private sector.
Transition countries: Apart from the voucher privatization experienced in transition countries and its similarity to the Justice Shares Distribution that discussed in detail (3.2.3 and 3.4), there are two other distinctive comparable characters that also identifies the bank privatization in transition countries.
First, bank privatization was considered as an essential part of the financial reform agendas in transition countries. Yet in Iran, privatizing only four state-owned banks next to seven more existed state-owned banks and other eleven private banks cannot be considered as an important or effective part of the financial or economic reform in the country.
Second, a positive relation between the rate of welcoming to the foreign investor and success of bank privatization has become a major distinguishing and ranking factor in international market. Yet in Iran, the absence of foreign investors and foreign banks are self-evidents addition to the occurred international sanctions during the past recent years.
China: To compare with the case of China (discussed in chapter four) it should be noted that:
The core policy of Chinese model was “retain to large, release the small”. Cao et al. (1999) indicated that despite of smoothly process within the three years (1994-1996) more than 70% of the action plan was done which included the privatization of 247,000 small firms and up to 30 million workers (more than 15% of Urban Labor force) were laid off. In contradiction, till 2010, many of Iranian large companies like ITC for near half of the total value of Stock Market, National Copper Company and a few other steel companies were privatized very ahead of the scheduled plan without being fractioned into smaller companies before sale, as it was supposed to. Instead, at the same time there were around 300 small and medium size companies, not privatized behind the schedule.
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Opposite to the huge lay off policy in China, the Iranian privatized SOEs are forbidden of any layoff for five years after privatization.
Gan et al. (2008) stated that management buyout (MBO) in China was account for close to half of all privatization programs, successful in improving the performance. Yet in Iran, only up to 5% of privatized SOEs` shares may be sold to the diffuse individual staffs under the title of Preferred Shares.
Any economic conditions define the required tools and methods for further economic reforms like the privatization plan. Coa et al. (1999) pointed the double-digit growth of China while, its gigantic position in the world economy is so unique and not comparable with any economic indices of any developing country. However, due to the descriptive report of IMF in 2010, the 8.6% economic growth of Iran in 2007 felt down to 1% in 2008 and became 1.1 in 2009 and is predicted to be 0 in 2011. Because of such a catastrophe the Central Bank of Iran has been prevented to announce the economic growth rate of the country since 2008 to the 2011 (date of report).
Coa et al. (1999) pointed the privatization together with the new capital raise, as one of the most important features in Chinese model. Yet, the majority of post privatized ownership structure of SOEs in Iran does not provide any new investment opportunity in their capital. Firstly because, the government as a 20% shareholder is forbidden to do any new investment in privatized SOEs during the 4th Economic and Social Development Plan and then after. Secondly because, the collection of Justice Shares in any SOE will be included in the same restriction before being distributed to the individuals, otherwise as notified in EOPC-44 (2010), the new probable owners of the Justice Shares from the lowest deciles will not be neither capable of nor interested in participating for any new investment in the privatized SOEs.
Finally, Cao et al. (1999) demonstrated the dramatic increase of FDI from annual investment of 4.4 billion $ in 1991 to 41.7 billion $ in 1996. On accumulated term, China had a total of 200 billion FDI by the mid 1997 and it was increased up to 148 billion$ in 2008.
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Fig. 5: Foreign Direct Investment of Iran, its Neighbors & China
Source: World Bank, World Development Indicators- Last Update November 19.2010
The gap that has been pictured in Fig.5 for the FDI`s trend and quantity in China and Iran plus no welcoming intention or reliable condition for FDI in a short coming future of Iran indicate no similarity never the less their comparison.
3.5.9. Key Questions in Bank Privatization VS Occurred Respondings in Iran
During the past three decades hundreds of commercial banks have been fully or partially privatized by governments of tens of countries either publicly through a public offerings of shares, or privately through an asset sale. Megginson (2005) submitted that in almost every case, this represented a fundamental break with a national past that emphasized the strategic role of commercial banking in funding the nation’s economic development, and the national government’s key role in planning and directing that development. Many other researchers have also raised some deliberated questions about bank privatization. The questions are generally the key entrance into the study and analysis of the reason, planning, implementation and the results of bank privatization. Therefore, this part will focus on some key questions and will discuss the responding of the privatizer government of Iran to them.
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3.5.9.1. Why has State Ownership of Commercial Banks been so historically Prevalent?
Commercial banking is arguably the most basic industry in a modern economy because of its central role in allocating capital and monitoring corporate borrowers. Regardless of their locations, organization structures or ownership structures Megginson (2005) submitted their three basic functions in any economic system as:
Play a central role in the country’s payments system and serving as a clearinghouse for payments.
Transforming claims issued by borrowers into other claims that depositors, creditors, or owners are willing to hold.
Providing a mechanism for evaluating, pricing and monitoring the credit granting function in an economy.
Of course, the efficiency, safety, effectiveness and transparency of these functions varies widely across countries mostly depending on the features such as who owns the banks, how the credit-granting process is managed and to whom credit is granted. In the context of a country like Iran with a thirty years history of state ownership of commercial banks, these efficiency, safety, and particularly transparency concerns are more complex and intractable laissez-faire economies especially now that the government’s claim of wealth distribution within the low income groups is mostly justified by dogma, rather than by serious economic theory.
3.5.9.2. Why Have Governments Launched Bank Privatization Programs?
Two factors were defined by Megginson (2005) as especially important for the upward intentions of bank privatization. First, compelling and overwhelming evidence showing that state ownership was not working as planned. Second, realizing that, financial system development promotes the economic growth. Although, there is
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no similar motivation for all commercial bank privatization but at least four reasons for bank privatization have been identified as:
First, when bank privatization be a part of the overall transitioning to a more market- based economic system as happened in transition countries (Megginson and Netter 2001). As such, these banks tend to be plagued with the greatest loan quality problems of all bank privatizations. Second, when there is a program to de- nationalize some state-owned firms. Third, when there is an ongoing effort to deregulate the overall financial system. Fourth, when the government has the primary objective of raising funds for the government itself.
Actually, as it has been discussed earlier, the privatizer government of Iran shows intention to more subjugate the private sector rather than a transition approach towards more market-based economy. But according to the obligation to implement the Article 44 of the Constitution law, privatizing the three banks of Mellat, Tejarat and Saderat may be considered as the motive of de-nationalizing. However, the appearance of the economic decisions has not been enough stable and consistent to result any ongoing effort to deregulate the overall financial system. Finally, the main part of share ceding of privatized banks includes the Justice Shares Allocation and shares ceded to barter government’s debt to the semi-government institutes. Therefore, it consequently indicates an insignificant amount of sale revenue.
3.5.9.3. How do Governments Select Banks to Privatize?
It is indeed an important question which banks governments will choose to sell and under what conditions? Clarke and Cull (2002) answered to this question as:
Poorly performing banks are more likely to be privatized.
Larger banks are less likely than smaller banks to be privatized.
Overstaffing tends to reduce the probability of privatization as the post or pr- sale staff cutoff will cause political pains. 273
Higher levels of provincial unemployment and higher shares of public employees reduce the likelihood of privatization.
Raising the financial costs of continued state bank increase the likelihood of privatization
In sum, both economic and political factors impact the privatization decision for individual banks, but political buyoffs seemed especially important factors. Eventually, the first two findings may be compatible to the case of Iran as the performance of the privatized banks (except the Post Bank) were not well because of their high bad loans resulted from high risky given facilities and weak credit potential emanate of high government’s debt to the banks. Additionally, the government has not cleared that why it has not privatized the other commercial banks that are in a larger size. The strengthening of the semi-government institutions instead of private sectors reveals that political buyoffs were much important than any economical objectives.
3.5.9.4. How do Governments Privatize State-Owned Banks?
There is a common set of concerns and issues in any bank privatization regardless of where or how it happens and include the type of privatization process to utilize, whether and how to break up the government-owned banking systems, dealing with an extremely low-quality loan portfolio, ensuring an enhanced level of managerial talent in the system, and ultimately attracting outside (often foreign) capital and expertise to the banking system (Clarke and Cull 2002).
To privatize the banks, governments usually choose one of the two techniques of asset sales, share-issue privatizations. While, in privatizing the Iranian banks the shares were first offered to the market for exploring the share price then, the shares were partly allocated to the Justice Shares similar to voucher or mass privatization. Ceding any other amount of banks’ shares was done through SIP which is the largest
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and most economically significant of all privatizations (Verbrugge, et al., 1999 and Otchere, 2003).
3.5.9.5. When the Governments Become Reluctant to Bank Privatization?
On the contrary of different motivations for government to launch bank privatization, there are many factors especially in developing countries that prevent governments from bank privatization. Clarke et al. (2004) studied how bank privatization has progressed in individual countries and how politics has influenced privatization decisions to find out the reasons of governments’ reluctance towards the bank privatization. They concluded that:
State ownership of banks could be justified as an efficient way to raise capital for projects with high social returns but low return on or to provide finance to poorer borrower that would be neglected by less well informed or motivated private bankers.
Government actors are politicians and bureaucrats, who may be motivated to use state ownership to secure political office, accumulate power, seek rents, or, have less reason to monitor well than a profit motivated private owner.
State actors will be most likely to act in self-interested ways in weak institutional settings where voters have less information and capacity to require good performance
In case of Iran the reluctance of government was mainly emanated from fear of losing the management control coincident with strengthening the private sector. Additionally, the financial structure of the banks due to the high debt of governments was not organized and prepared for privatization.
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3.5.9.6. How the Governments Determine the Time for the First Bank Privatization?
Boehmer et al. (2005) found that countries whose banks have less equity-capital and extend more loans to the government, and whose public officials are more accountable to the people privatize state-owned banks faster. In one instance, the duration results appear to point in a different direction than expected. Better capital market development is associated with a greater likelihood of a bank privatization. However, there are conflicting forces in the relationship between privatization and capital market development. On one hand (more important in developing countries), privatization can be used to improve the capital markets. On the other hand (more important in developed countries), it is easier to privatize a SOB by selling shares to the public in a country with a well-developed stock market.
The ownership structure of privatized banks of Iran stated in the previous part shows that the majority ownership was ceded in a form of either allocation of Justice Shares and share ceding to barter the government’s debt to the semi-government institutes or ceding to the semi-government institutes. Apart from the strong financial conditions of the semi-government institutes, the present capital market needless of any extra development, could easily afford the taking over of remaining part of around 30% -40% shares of privatized banks. Therefore, regardless of timing the start point, the action plan of share ceding was the main concern to the government.
3.5.10. Impact of Bank Privatization on the Capital Market of Iran
In general, privatization helps develop capital market. Boehmer et al. (2005) identified this aid particularly in privatization of SOBs and stated that development of capital market is one of the considerations for the government in deciding whether and when to privatize a SOB and the privatization of large banks through share offerings should enhance the liquidity of the nation’s equity market. With more shareholders, the market becomes more efficient. Verbrugge et al. (1999) documented that SOB privatizations have created hundreds of thousands of new shareholders in countries around the world. The benefits from SOB
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privatization should be most significant in the equity markets of developing nations. Also Denis and Mc Connel (2003) referred to the importance of the legal and political environment in the development of capital market.
As recently described, the method of share ceding in privatized banks of Iran was in a way that apart from the 20% government’s share, a very minor portion of the shares sold to the individuals and legal entities. Therefore, the market correctly presumed that there would be a serious determinant for major part of the shareholders (semi-government institutes) to avoid entering the rotating cycle of the stock market, mainly to provide the necessary opportunity for the government to retain the control of the privatized banks. The reaction to this presumption of limited float shares in the stock market was an increase in shares’ market price. In fact, the market price or initial returns of the investor as the reason of limited float shares in the TSE would not be consistent with the findings of Jones, Meginson, Nash, Netter (1999) that initial returns are significantly positively related to the fraction of the firm’s capital sold as it is shown in the following figure.
Fig. 6: Comparison of the ROI for each Privatized SOB and TSE
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Source: TSE Website, January 2011
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The impact of less float shares of the privatized banks in the market is one of the main reasons that demonstrate the return of investment for the privatized SOBs’ shares in Fig. 6 with the same or even better trend compared to the trend of the whole market in TSE.
As far as the banks in Iran has been privatized due to two different methods of mass privatization (for Justice Shares distribution) and SIPs then, it requires to separately consider the impacts of each of these two sale methods on the capital market.
Kogut and Spicer (2002) studied the case of Russia and the Czech Republic as the samples of mass privatization and concluded that mass privatization creates the contradictory conditions of generating millions of poorly informed shareholders, with no efficient markets for the sale of the shares. Additionally, the absence of financial markets creates systematic pressure to move assets by illegal or non-transparent means to users who value them more. The market condition of both these two example countries revealed that in the absence of institutional mechanisms of state regulation and trust, markets become arenas for political contests and economic manipulation.
Indeed, to show the results of mass privatization in Iran, nothing more needs to add to the above findings of Kogut and Spicer (2002). The Justice Shares of the privatized banks like the ceded Justice Shares of other SOEs are not tradable in the market because it is still the allocated shares under the control of the government instead of distributed share in the hands of the individuals. In this way, such a considerable shares amount of privatized banks has no effect on the capital market even though it has created an image of millions of so called shareholders as shown in Table 3. The repeatedly warnings of the government’s official to prevent the people from selling their Justice Shares’ royalty or concessions in black market would be sufficient to entirely cover the whole compatibility of the above findings with the resulted situation in Iran’s capital market due to the idea and the way of implementing the Justice Shares distribution. The latest managing director of IPO, Nouri (2011) announced that in a short coming future, 45 million people of the six lowest deciles will be covered by the distribution of Justice Shares and also warned the people who owns the loyalty of the Justice Shares to stop selling their loyalty by proxy as an illegal action. The signals of such an apprehensively expression are consistent with that of Kogut and Spicer (2002) mentioned the 278
millions of poorly informed shareholders who transfer their asset (the same as loyalty papers of Justice Shares in Iran) through illegal or non-transparent transactions.
The second implemented sale method for privatizing the SOBs in Iran was SIP through which all the semi-governments, individuals and private legal entities bought the offered shares through TSE.
Megginson (2005) stated that SIPs are the largest and most economically significant of all privatizations, and account for the preponderance of the value of assets privatized outside formerly communist countries. Bank privatizations in OECD countries, and the very largest sales in developing countries, tend to be SIPs. For example, all of the privatizations studied by Verbrugge, Megginson, Owens (1999) and Otchere (2003) are SIPs. It was the same for the case of Iran and by ignoring the ceded shares through Justice Shares allocation and bartering the government’s debt to the semi-governments institutes then, the SIP was the main method that implemented for ceding the remained shares of privatized banks in the market. FNA (2011) reported that the performance of eight registered Iranian banks in TSE in 2010-2011, resulted 13.5% of total market value of the stock market and therefore the rank of the banking industry became the third (after privatized two steel industries and the telecom) among thirty six industries active in the TSE. This was consistent with the findings of Megginson and Bouchkova (2000) pointing on the expansion of the capital market due to the privatization and the privatized firms as the most valuable companies in the stock market. According to the report of FNA, on 7 March, 2011the total market value of eight registered banks in TSE, including the four privatized banks, was about $16.5 billion while, the value for the other unregistered sixteen banks (including SOBs and PBs) was estimated about $20 billion.
The registered capitals of the privatized SOBs in billion Rl. were as: Saderat-16,803, 000; Tejarat- 10,437,384; Mellat- 13,100,000; and Post Bank-700,000. However, comparison of the total capital of privatized SOBS with the same figure for the total registered capitals of four active PBs of Parsian, Kar Afarin, Eghtesad-e Novin and Sina in TSE shows that the portion of privatized SOBs in TSE is more than twenty folds of the PBs. Therefore, the 13.5% portion of the stock market value of the registered banks is indeed owed to the presence of the privatized SOBs in TSE rather than the PBs. This means that the privatized banks have had an 279
impact on enlarging the size of the capital market but particularly on its surface area and not in its depth because apart from the impact of their total value, only less than 30% of their shares are in the transaction cycle of the stock market because of untradeable Justice Shares and unwilling shareholders (semi-government institutes) to trade their shares. Therefore, regarding the dispersed shares in each privatized banks, only around 30% of the total shares of the privatized banks could be considered floating in the market and has an impact on the transaction depth of the stock market. However, this low limited amount of floating shares of the privatized banks regardless of any other factor has a direct impact on the share price increase and provides a very considerable rate of return for the investors.
Fig.7: Comparison of the ROI for the TSE and Registered Private Banks in TSE
ﻧﻮﻳﻦ ﭘﺎرﺳﻴﺎن آﺎرﺁﻓﺮﻳﻦ %ﺑﺎزدهﯽ ﺑﺎزار
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Source: TSE Website, January 2011
The positive difference between the share price trends of the PBs and TSE’s trend shown in fig. 7 is significantly more than the same comparison for the privatized SOB, shown in Fig. 6 even though, the float shares of the PBs is much more than those for the privatized SOBs. That implies that the capital market has more optimistic approach towards the PBs’ shares rather than the privatized SOBs’ shares.
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Fig.8: Comparison of Average ROI for the TSE and the Private and Privatized Banks Registered in TSE
ﻣﻴﺎﻧﮕﻴﻦ ﺑﺎزدﻩ ﺧﺼﻮﺻﻲ ﻣﻴﺎﻧﮕﻴﻦ ﺑﺎزدﻩ ﺧﺼﻮﺻﻲ ﺳﺎزي ﺷﺪﻩ %ﺑﺎزدهﯽ ﺑﺎزار
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Source: TSE Website, January 2011
Fig. 8 clearly demonstrate the tremendous fluctuation in the TSE with the higher proportion of PBs’ share compared with the privatized SOBs since the date of privatization of the first SOB to the end of January 2011.
All in all, it results that despite of successive and relatively intense fluctuation in the stock market yet the banks’ shares provide a considerable return for their investors because the stock market is the main area for wandering money that highly has been spread over due to high amount of capital injection into the market since 2007. This point should be added to the fact of very limited amount of float shares of the banks in the stock market that create a high demand for these shares.
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3.5.11. Related Beneficiary Groups of Success Evaluation of Banking Industry
Generally, any success evaluation depends on the perception of the evaluator and its beneficiary relation with the issue to be evaluated. Therefore, necessarily should indicate that the private banking of Iran, including the privatized SOBs is facing the different groups of beneficiaries which may provide the different evaluation results. In other words, identification of the success conditions in privatizing the state owned banks as the core subject of this thesis strictly depends on the differentiated definitions of “success” from the viewpoint of each different beneficiary group. However, before going to the next chapter to analyze the reasons and discuss the main questions of the thesis, it needs to more focus on the beneficiary groups of the privatized and private banking system in Iran.
Generally, there are many distinguished and applicable scales and methods to evaluate the kinds and amount of success in banks privatization. Profitability, share price, customer satisfaction, efficiency, volume of absorbed deposits or given facilities, interest rate and product variation, all are the scales that can be utilized in evaluation of success or fail of the bank privatization. But eventually, not all of them can be applied by each group of the beneficiaries.
The widest possible classification of the beneficiaries groups of the private banking in Iran can be differentiated in six groups as shown in table 10. It is important to note that the beneficiaries of the banks privatization are not necessarily the beneficiaries of the next step or when the state-owned banks are being privatized and should continue their operation like the private banks or vice versa.
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Table14. Classification Beneficiaries Group of SOBs Privatization and Privatized SOBs
Benefited of: No. Beneficiary Group Bank Privatization Privatized Bank
Results Operation
1 Government 9 9
2 Investors or new owners after privatization 9 9
3 Banks’ clients 9
4 Banks’ staffs 9
5 Competitors 9
6 Public 9 9
Table 14 presents that three beneficiary groups of government, investors and the public are beneficiary in both success discussion of banks privatization and privatized banks and the remaining three groups of bank’s clients, staffs and competitors are only involved in the success discussion of privatized banks as they do not have any major role or participation in the stage of privatization.
By taking the advantage of worldwide studies and experiences review, the argument of how to define and evaluate the success can be reasoned as follow for each beneficiary group in Iran.
The government: Generally, from the viewpoint of government, the amount of success at the stage of banks privatization depends on:
How privatization did contribute to achieve the political targets and objectives? How privatization did contribute to reduce the fiscal deficit? How was the sale condition (price and the proportion of cash and credit in sale)? 283
The judgment differs for the success of privatized banks. At this stage the government mostly has to evaluate the results and impacts of SOBs privatization on the area such as political consequences, cost reduction and income growth for the government addition to the change of functions like inflation rate, employment rate, services level, cash liquidity, reduction in the size and incumbency of the government.
The private owners: The Iranian investors of real private sector (excluding semi-government institutes) who directly buy the offered shares of the SOB’s from the government, are involved in the evaluation of privatization stage shoulder to shoulder to the government but of course from different angle with different logic. From their point of view, the successful privatization is the one that be well equipped at least with clear information, transparent pricing (resulted of true market demand and not of an artificial or commanded demand), equal condition of competition without providing any discriminative or rentier facilities for the semi-government institutions and the pressure groups and finally, the coincident transferring of management with the transfer of ownership. Despite of minor individuals whose interest are mostly limited to the market price or dividend and the liquidity of the SOB’s share yet, the above mentioned investors or any other major private shareholder presumably evaluate the success of privatized banks with amount of their achievement compare to their strategic objectives. Although, in countries like Iran such a strategic objectives partly would include political nature but as usual, the first priority for the private sector is profit or return on investment and a long after that the other exalted objectives like social dignity or international status. Any measuring or increasing function of profit is under the observation of the private owners in their evaluation.
The bank’s clients: This group of beneficiary can and would evaluate only the success of privatized banks and not the privatization stage of SOBs. In case of existence of the competitive conditions for private banking system, the clients may measure the success of privatized bank by comparing the collection of its provided banking services before and after privatization. Additionally, any bank’s clients also compare the other banks’ services with the condition of their involved bank. Naturally, form the client’s viewpoint, better client relation and more services will be the good enough indications to evaluate the success of privatized
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banks. However, in incompetent banking system of Iran, any attempt to evaluate the operation and services of the privatized banks would be limited to some superficial indications devoid of real concept of success.
The competitors: Apart from the banks, any active institution in capital market can be assumed as a competitor for the privatized SOBs. All the potentials or implemented efforts in absorbing more money and creating more market share are the areas that this beneficiary group may apply to evaluate the success of privatized SOBs. Of course, the soundlessness of the capital market in Iran during the last few years indicates that the capital market’s actors of any area rather behave very conservative and pretend to welcome any new comers into the capital market without contributing any constructive idea or improving criticism. Therefore, a complex feedback and indirect evaluation signals from this group of beneficiary is not unforeseeable.
Staffs: Each banks’ staffs, the same as the banks’ clients, are the kind of qualified beneficiary group who precisely may evaluate only the success of privatized SOBs. Any change in the organization structure, in management behavior, in human resource strategies and the way and amount of implementing the strategies in their personal cost and benefit and even the new bank status after the privatization are the areas of evaluation of success in privatized banks by the beneficiary group of bank’s staffs.
Public: The last and the most important rightful beneficiary group is the Iranian nation. This group of beneficiary, like any other nation in the world and as the real owner of national wealth, may express any comments or evaluate any national issue including the SOBs privatization and privatized banks. Normally, it necessitates the active presence of fundamental social institutions like independent mass media, parties, parliament and the individual experts that could take the responsibility of evaluating this sort of national cases on behalf of the public. Meanwhile they should have the opportunity (freedom) of announcing their opinions or their investigated conclusions to the public.
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3.5.12. Concluding Remarks
1- Establishment of private banks in Iran was a very important part of economic reform during the last three decades and a best laying the groundwork for privatizing the state- owned banks. 2- Private banks’ operation have had a positive impact on enlarging and more activating the capital market, improvement of corporate governance even though not in a sufficient scale, motivating the state-owned banks towards costumer oriented status, institutional reforms and very little on revival of human capital. 3- Government intervention in banking system of Iran, gradually negated the privileges of the private banking, weakened the credit potential of SOBs and diluted the observing authority and independency of the Central Bank. 4- In general, the public suffer from clear reports on privatized SOBs. 5- The more determinant factor for bank privatization in OECD countries is economic and in Non-OECD countries is political together with direct relation of political stability. 6- In transition countries, the SOBs privatization proceeded through liberalizing and decentralizing the banking system, re-structuring the SOBs and allowance of new domestic and foreign private banks enter the market. 7- The primary widespread privatization method in transition countries was voucher privatization with less success that replaced with foreign investor participation for a credible success.8Due to the ownership structure of privatized banks in Iran, government has their management control. 8- There are not enough indications of transparent and healthy ceding in SOBs privatization of Iran but instead, there are many examples of law violations by the government during the SOBs privatization. 9- SOBs privatization has enlarged the size of the stock market but not its depth. 10- The increase of share price of the privatized SOBs is mainly because of very limited amount of their floating shares and stagnation in other sections of capital market.
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3.6. Chapter Six: ANALYSIS OF STATEOWNED BANKS’ PRIVATIZATION STAGES AND THE APPROACH TOWARDS THE SUCCESSFUL CONTINUATION OF IRANIAN PRIVATE BANKING AT THE RESULTED CONDITION 3.6.1. Methodology
Data employed for the purpose of this study were categorized in two group of primary and secondary data level.
The primary data used in this chapter are mainly derived from 60 questioners (Appendix 9) and 48 interviews. The responders to the questioners were selected among the highly experienced people (with their total of 1180 years work experience in government and overlapped experiences of 516 years in private sector) or very knowledgeable academicians and experts (with total of 656 years experience in academic area partly overlapped with their work experiences in other areas), all currently involved with the different aspects of the thesis’s subject. Therefore, it became an exceptional and valuable opportunity to collect the wider viewpoints and opinions of such an elite executives and experts of the country in this study through questioner and interview. However, 80% of the responders to the questioner were coincidentally interviewed by semi-conductive method generally with more deepening in the area of the provided subjects in the questioner and each interview took about 2-3 hours. For the rest 20%, first the academic identity and objective of the case was clearly expounded and then the questioner was sent to them. All the data (through questioner and interview) were collected during October-December, 2010 with a hard attempt in accessing the responders specially the interviewees, and convincing them to trust and devote the required time.
The main structure of the questioner is partitioned into three sections of; SOBs privatization in Iran, the conditions of privatized and private banks in Iran and, conditions of success for continuation of private banking in Iran.
The specification of the combination in the statistical population is shown in table below.
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Table14. Combination of Statistical Population
Position No. of No. of interviewee questioner responder
Minister 9 9
Deputy minister 6 7
Central Bank governor/deputy 11 12
Managing director/board member of Private or state 11 12 owned bank
Parliament member 3 3
Top manager of large private/state- owned company 24 28
Manager of small company 1 7
Member of High Council of Money and Credit 3 3
Academician 4 6
The difference between the total numbers of the questioner responders with the figure 60 and interviewees’ number with the figure 48 is because of their different or overlapped positions during their work experience.
The secondary level data collected from the country`s laws and regulations documents, the publicized official reports or the published opinion and analytical views of the officials and experts in the censored daily newspapers of the country.
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Regarding the collected data, the results have been analyzed through the merged method of qualitative and quantitative base.
The main part of the data collected from the distributed questioner is quantitatively analyzed, especially by descriptive and statistical methods. Therefore, each question will be considered as a statistical variable. Most of the questions in the questioner are multiple choices with the discrete variables. The data also are either ordinal or nominal that each will follow their related statistical methodology. The percentage of the responds for each variable, are shown by bar chart to demonstrate the general schematic distribution of the responds. Obviously, each methodology of testing has been selected in relation to the related hypothesis while considering the discrete type of the data.
The main statistic analysis methods implemental in this thesis are: Proportions estimation and their 95% confident interval.
Comparison of the proportions with ordinary value (in H0). Comparison of favorite proportion in two groups. Testing the significant difference between groups’ mean Tests of multiple comparisons to identify the strongest factors or proposed method
The analysis and estimation of the proportion
Proportion analysis is one of the main methods to analyze the collected data. Based on this method, the proportion of favored response to all the responses is estimated. This estimation usually will be compared with one ordinary value or the same proportion in another group. Addition to this point estimation for the mentioned proportion the 95% confidence interval will be provided in each case.
In estimation of the proportion, each observation belongs to one of the suitable or unsuitable group of responses that indicates the data are binomially distributed. The binomial distribution has benefits the good characteristics in approximation of normal distribution which is used in most of parametric statistical analysis. Therefore, for parametric analysis of the discrete collected data, specifically in comparison of different groups or constructing the
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confidence intervals, one of the preferred methods will be implementing the binomial distribution and consequently the proportion analysis. This will help us to achieve the normality assumption. To compare the proportions, several forms of t-student test are being applied.
Test of significant mean score difference:
One of the major points of analysis is investigating the statistical significant different within the groups or the discrete data. As the collected data are discrete they will definitely not follow the normal distribution which is the main assumption for using ANOVA method. Therefore, to relax the normality assumption the Non-parametric method is identified as the best method and Kruskal-Wallis test will be implemented.
Multiple comparisons:
In most of the required hypothesis testing, the identification of either the strongest or the weakest factor is important. To achieve this, the multiple comparisons for the score mean of the factors are required. As a part of ANOVA method, the result of multiple comparisons depends on the normality and variance homogeneity assumption (model adequacy assumption). By being confident about the existence of the significant difference between the compared factors or groups through Kruskal-Wallis test, the multiple comparisons test will be the selected choice.
There are different tests of multiple comparisons that their validities depend on some assumption such as the homogeneity of variances. When the group variances are homogeneous then, one of the best tests could be the Tukey HSD test. Otherwise, the Tamhane’s T2 test can be the preferred choice for the multiple comparisons among the groups. The homogeneity test of variances will be obtained by Levene test.
At the end of quantitative analysis of each question, the expressed underlined issues of the interviewees on the same question have been added to the results.
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3.6.2. Analysis
In this part with relying on the work experience of the key positioned interviewees that significantly values their viewpoints, the analysis of the responding will be explained.
The main objective of this thesis considered in the questioner, is to find out:
Has the privatization of SOBs been successful in Iran or not and why? Are the individual conditions of privatized SOBs and private banks potentially conforming the conditions of success for continuation of private banking in Iran or not and why? What are the basic considerations to pave the road of success for private banking of Iran at the existed situation? How possible and helpful will be the change in organized ownership combination of privatized banks towards shifting the management control to the private sector? How important and helpful will be the entry of foreign investors and foreign banks into the banking industry of Iran?
Accordingly, here after, the analysis will be explained based on the sequences of the aforementioned main segmentations.
3.6.2.1. Evaluation of SOBs privatization in Iran at Pre-privatization Stage
At the pre-privatization stage, considering the market condition is one of the basics for the success of privatization (Kikeri, Nellis, Shirley, 1992). However, in respect of the financial nature of the banks, the financial re-structuring also enjoys of great deal of importance in bank privatization especially when the debt amount of government is very distinguishable. Also, the matter of organizational re-structuring has been identified as a factor for raising the sale revenue for the government (Lopes-de- Silanes, 1997 and Chong and Lopez-de-Silanes, 2002, 2003).
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Based on the mentioned basic requirements of bank privatization, the following six questions had been designed in the questioner to evaluate how the government considered applying these requirements at the pre-privatization stage. The questions are shown below from Q1 to Q6.
1- Study of market condition and private sector potential and interest (Q1)
2- The capability of the government to re-structure before privatization compared to the private sector’s after the privatization (Q2)
3- Pre- privatization organization re- structuring (Q3)
4- Pre- privatization financial re-structuring (Q4)
5- The importance of buyer’s qualification (minor question- Q5)
6- How much the buyer’s qualification was considered in SOBs privatization? (Q6)
The evaluation of the responders in this part has been ranked into:
1-None 2- Little 3- Moderate 4- Completely
First, the descriptive statistics of the indices of the above questions are shown in the following bar charts.
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Consideration of Market Condition and Potential of Private Sector
60.0%
50.0% 50.0%
40.0%
30.0% 25.0% 23.3%
20.0%
10.0% 1.7% 0.0% pletelyﮐﺎﻣﻼCom ﻧﺴﺒﺘﺎModerate ﮐﻤﯽLittle اﺻﻼNone
Government’s Capability of SOB’s Organizational Restructuring Compared to the Private Sector
60.0% 51.7% 50.0%
40.0%
30.0%
20.0% 20.0% 18.3%
10.0% 8.3% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦﮐﺎﻣﻼ ﻧﺴﺒﺘﺎ ﮐﻤﯽ اﺻﻼ
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Pre-privatization Organizational Re-structuring of SOBs
70.0% 65.0%
60.0%
50.0%
40.0%
30.0% 23.3% 20.0% 11.7% 10.0%
0.0% ﻧﺴﺒﺘﺎ ﮐﻤﯽ اﺻﻼ
Pre-privatization Financial Re-structuring of SOBs
50.0% 45.0% 45.0% 40.0% 35.0% 33.3% 30.0% 25.0% 20.0% 20.0% 15.0% 10.0% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﻧﺴﺒﺘﺎ ﮐﻤﻲ اﺻﻼ
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Importance of buyer qualification in SOB privatization
35.0% 33.3% 31.7% 30.0%
25.0% 20.0% 20.0% 15.0% 15.0%
10.0%
5.0%
0.0% ﮐﺎﻣﻼ ﻧﺴﺒﺘﺎ ﮐﻤﯽ اﺻﻼ
Considered buyers qualification in SOBs privatization
70.0% 66.7%
60.0%
50.0%
40.0%
30.0% 23.3% 20.0% 10.0% 10.0%
0.0% ﻧﺴﺒﺘﺎ ﮐﻤﯽ اﺻﻼ
One of the main discussions in this part is to examine both positive and negative judgment of the responders about the occurred implementation of each index at the pre-privatization stage. For this analysis the first and second choices of “None” and “Little” will be combined as negative responds and the same combination is assumed for the third and fourth choices of “Moderate” and “Completely” as the positive
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responds. This combination makes it possible to access the binominal distribution, for a better approximation of normal distribution and in this condition, t-student test have a better justification for estimate and examine the proportion of positive and negative responds about the amount of execution or implementing of each index.
The estimated proportions of positive and negative responds to the Q1, Q2, Q3, Q4 and Q6 are as follow:
Estimated Proportion Question Index Positive Negative Respond Respond
Study and analysis of market condition, potential and Q1 27% 73% interest of private sector
Government’s capability to organizational Q2 27% 73% re-structuring, compared with the private sector
Q3 Pre- privatization organizational re-structuring of SOBs 12% 88%
Q4 Pre-privatization financial re-structuring of SOBs 20% 80%
Q5 Considered quality of the buyer in privatizing the SOBs 10% 90%
Among the above, the indices of “Considered quality of the buyers” and “organizational re-structuring” with consequently 10% and 12% positive respond has been identified as the weakest indices at the pre-privatization stage.
We chose P to present the positive responds to each of the questions of 1to 4 and 6. Then, the relative hypothesis will be:
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⎧⎧Hp00:=− 0.5 Hp: 0.5= 0 ⎨⎨ or Hp:0.5≠−Hp:0.50≠ ⎩⎩11
Selection of the figure 0.5 (50%) for the positive respond`s proportion in null hypothesis is based on this fact that if in normal condition there is no significant statistical preference for each of the positive and negative responds then, the estimated proportion for both of the positive and negative responds should be the same and be equal to 0.5. Other-wise, the null hypothesis will be rejected.
The test result of positive responds to the questions 1to 4 and 6 of the questioner are shown in the following One-Sample Test.
One-Sample Test
Test Value = 0.5 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper tq1 -4.053 59 .000 -.233 -.35 -.12
-3.920 58 .000 -.229 -.35 -.11
-9.172 59 .000 -.383 -.47 -.30
-5.612 58 .000 -.297 -.40 -.19
-10.242 59 .000 -.400 -.48 -.32
The result shows that for the five considered indices, there is sufficient evident to reject the null hypothesis (H0) and this is obvious when we consider the amount of p- 297
value (sig. 2-tailed) in the above table represents that we will have very small amount
of error for rejecting H0 thus, it means the positive responds towards the necessary executions at the pre-privatization stage are significantly different from 50%. That means the responders did not support the execution of financial and organizational re- structuring of the privatized banks at pre- privatization stage addition to ignoring the TSE’s regulations and study the market condition and investors potentials.
Alternatively, on the base of 95% confidence interval for the proportion difference between positive responds and the figure of 0.5, (p-0.5) in the above table, the 95% confidence interval for the positive and negative responds will also be resulted.
Positives’ Negatives’ Proportion proportion Estimation Estimation Question Index Bounds Bounds
Lower Upper Lower Upper
Identifying the market condition, potential and Q1 15% 38% 62% 85% interest of private sector
Government’s capability in organizational re- Q2 15% 39% 61% 85% structuring compare to the private sector
Q3 Pre-privatization organizational re-structure 3% 29% 80% 97%
Q4 Pre-privatization financial re-structure 10% 31% 69% 90%
Q5 Considering buyer’s qualification 2% 18% 82% 98%
The results in table above show that for example the proportion of positive responds to “identifying the market condition and potential and interest of private sector” with the 95% confident is between 15%-38% (less than 50%). Alternatively, the negative
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responds’ proportion for the same index fluctuates between 62%-85% with 95% confidence. The same methodology could interpret the positive and negative responds to the remaining indices in this table as well as negative responds. For example, the proportion of negative responds to the same aforesaid index with 95% confidence is between 62%-85% (more than 50%) that represents the responders do not confirm the execution of this index at the pre-privatization stage.
Accordingly, the responders to the questioner have not confirmed the consideration of necessary executions of the basic requirement of bank privatization provided in questions 1, 2, 3, 4, 6 of the questioners. The result shows that with 95% confident interval the government has avoid or ignored to execute or consider the wide range of issues (from identifying the market conditions to the financial restructuring the SOBs) at the pre-privatization stage.
The results are consistent with the responders’ added points in their interview. They partly believed that the importance of rapid SOBs privatization was so high that the government did not care for the buyer’s qualification and partly believed that as far as the main ceding was supposed to be to the semi-government institutes therefore, the government did not need to care to investigate or consider the buyer’s qualification anyway.
The interviews reconfirmed their responds to refuse any kind of re-structuring of privatized banks before privatization. They indicated that identifying the market condition was mainly done through pre-negotiations with semi-government institutes.
3.6.2.2. Evaluation of SOBs Privatization in Iran at Execution Stage
According to the mentioned objectives of privatization in Article 44 of the Constitution Law of the country, the following indices are studied to find the amount of conformity of the privatization procedure of SOBs with the objectives emphasized in Article 44. The indices in this part are defined as:
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The conformity of ceding method of SOBs with the objective of reduction of government’s incumbency. (Q7/ tq7)
The conformity of ceding method of SOBs with the objective of strengthening the private sector and expanding its involvement in economical activities. (Q8/ tq8)
Evaluating the ceding method either it was intentionally implemented to avoid reduction of government’s control and incumbency in privatized SOBs or not. (Q9/ tq9)
The conformity of privatization procedure of SOBs (share offering stage) with TSE’s current regulations. (Q10/ tq10)
The following bar charts show the collected responds to the questions 7, 8, and 9, of the questioner with the coding of:
0-No 1-Moderate 2-Yes
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Conformity of Ceding Method with the Objective of Government’s Incumbency
Reduction
60.0% 51.7% 50.0% 40.0% 40.0%
30.0%
20.0%
8.3% 10.0%
0.0% ﺑﻠﻲ ﺗﺎ ﺣﺪوديﺧﻴﺮ
Conformity of Ceding Method with the Objective of the Strengthening the Private Sector and Expanding its Involvement in Economic Activities
70.0% 61.7% 60.0%
50.0%
40.0% 31.7% 30.0%
20.0%
10.0% 5.0% 1.7% 0.0% ﭘﺎﺳﺦﺑﻲ ﺑﻠﻲ ﺗﺎ ﺣﺪوديﺧﻴﺮ
301
Conformity of Ceding Method as the Reason of Government’s Avoidance of Reducing its Incumbency and Control in Privatized SOBs
50.0%
45.0% 43.3%
40.0%
35.0% 30.0% 30.0% 26.7% 25.0%
20.0%
15.0%
10.0%
5.0%
0.0% ﺑﻠﻲ ﺗﺎ ﺣﺪوديﺧﻴﺮ
Consideration of TSE’s Regulations during the Share Offering of SOBs
90.0% 78.3% 80.0%
70.0%
60.0%
50.0%
40.0%
30.0% 18.3% 20.0%
10.0% 3.3% 0.0%
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Except question 9 that examine the intention of the government as a minor question, the above bar chart indicates that the majority of the responders do not support the conformity of the execution stage with prevention of enlarging the government, strengthening the private sector and consideration of current regulations in TSE during the share offering of SOBs.
In statistical analysis we will examine the proportion of positive or negative responds towards the claim about implementing each related index at the execution stage.
It makes necessary to assume the choice of “No” in questions 7 (Q7), 8(Q8) and 9(Q9) as negative respond and the combination of “Moderate” and “Yes”, as the positive respond. The choices of “yes” and “No” in question 10 (Q10) will also demonstrate the specific portion of positive and negative responds.
The estimation of positive and negative proportions in the questions7 to 10 of the questioner is as below:
Estimated Estimated Question Index Positive Negative Proportion Proportion
Conformity of SOB’s ceding method with the objective of Q7 48% 52% government’s incumbency reduction
Conformity of SOB’s ceding method with the objective of Q8 strengthening the private sector and expanding its 37% 63% involvement in economic activities
Conformity of Ceding Method as the Reason of Q9 Government’s Avoidance of Reducing its Incumbency and 73% 27% Control in Privatized SOBs
Consideration of TSE’s regulations during the share Q10 19% 81% offering SOBs
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Within the three indices for execution stage (excluding Q9), the consideration of TSE’s regulation during the share offering of SOBs has benefited the least positive respond and only 19% of the respondents confirmed this regulation.
In questions 7 to 9, the amount of positive choice is the combination result of two of the three general choices. Therefore the amount of pre-assumption parameter for the positives’ proportion will be considered equal to 0.66. Therefore the hypothesis will be as:
⎧⎧Hp00:= 0.66 Hp:−= 0.66 0 ⎨⎨ or Hp:0.66≠ Hp:0.660−≠ ⎩⎩11
Null hypothesis indicates that if the positive and negative responds (considering the combination of the choices), will be equilibrium with no significant preference of each to the others then, the positives’ proportion should be very close to 66%. On the contrary, if this claim was not right then, the null hypothesis will be rejected to the benefit of alternative hypothesis as an indication of the significant preference of one of the positive or negative responds to the other.
Also, the related hypothesis of the proportion of positive responds to the consideration of TSE’s regulations during the share offering of SOBs shown below as it is a two- choices question:
⎧⎧Hp00:=− 0.5 Hp: 0.5= 0 ⎨⎨ or Hp:0.5≠−Hp:0.50≠ ⎩⎩11
The result of examined hypothesis of positives’ proportion for the question 7 (tq 7), 8 (tq 8), 9 (tq 9) and 10 (tq 10) are as followings:
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One-Sample Test
Test Value = 0.66666 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper
-2.818 59 .007 -.183 -.31 -.05
-4.627 58 .000 -.294 -.42 -.17
1.158 59 .251 .067 -.05 .18
One-Sample Test
Test Value = 0.5 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper
-5.822 56 .000 -.307 -.41 -.20
The results of t-student test indicate sufficient evidences in questions 7, 8 and 10 to reject the null hypothesis. In other words, the agreement of 66.6% of the responders about the questions 7, 8 and 10 is rejected and the positives’ proportion in questions 7 and 8 are significantly less than 66.6% and in question 10 is less than 50%. Alternatively, the proportion is more than 66.6% in questions 7 and 8 and more than 50% in question 10 for a negative attitude of the responders towards the conformity of the SOBs privatization with the related objectives. In other words, the responders significantly substantiate that the ceding was intentionally executed in such a way that did not fulfilled the reduction of government’s incumbency and strengthening the
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private sector meanwhile the consideration of TSE’s regulation during the procedure was not acceptable.
Additionally, in question 9, the positives’ proportion does not show any significant difference with the figure of 66.6%. It means the responders have significantly confirmed the avoidance or negative intention of the government to reduce its incumbency and control in the privatized SOBs in a way that the privatization has been executed.
Based on the results from the above table, the confidence interval for the difference of the positives’ proportion with 66.6% in questions 7 and 8 ( p − 0.66 ) and the difference of the positives’ proportion with 50% in question 10 ( p − 0.5 ) would be revealed.
Therefore, the confidence interval of the 95% for the positives’ and negatives’ proportion will be as below:\
Positives’ Negatives’ Proportion proportion Estimation Question Index Estimation Bounds Bounds
Lower Upper Lower Upper
Conformity of SOB’s ceding method with the Q7 objective of government’s incumbency 5.6% 1.6% 8.4% 64.4% reduction
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Conformity of SOB’s ceding method with the Q8 objective of strengthening the private sector and 4.6% 49.6% 50.4% 75.4% expanding its involvement in economic activity
Conformity of SOB’s ceding method because Q9 of government’s avoidance in reduction of its 61.6% 84.6% 15.4% 38,4% incumbency and control of the privatized SOBs
Consideration of TSE’s regulations during the Q10 9% 0% 0% 91% share offering of SOBs
The above results demonstrate that for example, the agreement proportion of the responders towards the relatively execution of “conformity of ceding method with the objective of strengthening the private sector and expanding its involvement in economic activities” with 95% confidence interval is between 24.6%-49.6%.
While, the disagreement proportion about execution of this index with 95% confidence is fluctuating between 50.4 and 75.4%. The remaining indices would be interpreted in a same way.
The responders, with 95% confidence have not confirmed that the privatization of the SOBs because of the ceding method implemented in the privatization procedure has conformity with the main objectives of reduction of government`s incumbency in economic activities and strengthening the private sector and expanding its involvement in economic activities.
Meanwhile, the responders with the 95% confidence interval confirm the avoiding intention of the government in reducing its incumbency and control in the privatized SOBs and the share offering procedure of SOBs did not apply to necessary consideration of TSE’s regulations.
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These results are consistent with the highlighted opinions of the interviewees while they strongly believed that as the reason of the government’s reluctance in losing its incumbency in economic activities subsequently, there would be no tendency to strengthen the private sector and expand its involvement in economic activities.
Most near to all of the interviewees believed that the pricing of SOBs shares was mainly the result of pre-agreement of the government as the seller, with the semi- government institute/s as the buyer. Therefore, they give a little credit to the competition during the price exploration of the SOBs’ share in the TSE. Meanwhile, they take the violence of the regulations in TSE as one of the symptom of opaque procedure of SOBs privatization.
3.6.2.3. Independency of Privatized SOBs’ Management in Policy and Decision Making
In this part, the capability of appointed managements of privatized SOBs in avoiding the government`s orderly intervention, specifically in policy and decision making is being considered as another index of success in privatization of SOBs.
The responders evaluated the meaning capabilities by the following choices of ranking:
1-None 2- Little 3-Moderate 4- Very 5-Very much-5
According to the collected data the following bar chart demonstrates the percentage of the responds for each ranking of this index.
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Capability of Privatized SOBs’ Managements to Avoid the Orderly Intervention of the Government in Policy and Decision Makings
60.0%
48.3% 50.0% 41.7% 40.0%
30.0%
20.0%
8.3% 10.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦﻧﺴﺒﺘﺎ آﻤﻲ اﺻﻼ
In normal condition if this capability would not be evaluated more or less than the moderate then, around 20% of the respond should be allocated to each choice and consequently, the total proportion of the responds of “none” and “little” would be 40% of the total responds. However, (apart from no “very much “answer among all the responds) the above bar chart demonstrates this proportion as 90%. If the estimated proportion of these two responds statistically and significantly became more or less than 40%, it would indicate that the capability of the management to avoid the orderly intervention of the government is high or low.
Assuming p as a low capability and related hypothesis as:
⎧⎧Hp00:′′=− 0.4 Hp: 0.4= 0 ⎨⎨ or ⎩⎩Hp11:′′≠− 0.4 Hp: 0.4≠ 0
The results for t-student test would be shown in the below table.
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One-Sample Test
Test Value = 0.4 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper tq11_3 12.802 59 .000 .500 .42 .58
The p-value for the test shows that with sufficient evidence the null hypothesis is rejected and this proportion with the probability of 99% is different from 40%. Also with 95% confidence interval the estimated proportion is different from 0.4 and it brings up the result that the percentage of low management’s capability with 95% confident would fluctuate between 82% and 98%. It confirms that the responders believe that the appointed managements of privatized SOBs do not have the capability to avoid the orderly intervention of the government in their decision or policy making.
All the interviewees believed that the appointment of the privatized SOBs’ management is on the condition of not disobeying the government’s unwritten desires which is very beyond of disregarding the government’s orders.
3.6.2.4. Success Evaluation of SOBs Privatization
Generally in any privatization, increase of efficiency should be much more important than distribution of ownership (Kikeri et al., 1992). On the other hand, there are so many studies concluding that state managers for different reasons would not have a better performance than private managers mostly because they are not motivated to put their best efforts because they do not face a credible threat of losing their jobs for non-performance management (Berglof and Ronald, 1998) and working with multiple masters or abandon of manpower also cause weak incentives for the state managers to pursue efficiency (Dixit, 2002) and consequently they will have much weaker
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incentives and capabilities to oppose the intervention and influence of political actors or government as a whole (Shliefer and Vishny, 1994). Specifically in the case of Iran and according to the privatization plan which includes the issue of Justice Shares Distribution, it should be notified those studies’ findings submit that wide dispersed ownership distribution makes the government a de facto representative of the owners and sacrifice the management performance (Kikeri et al., 1992). Therefore, we expected the responders of the questioner to evaluate how each of the ownership and management of privatized SOBs have been transferred to the private sector, focusing on the fact that the existed managements are the government appointed and previously being evaluated as not capable of behaving independent.
The proportions of agreement or disagreement responds to these two basic elements are shown below:
Agreement Disagreement No. Success Index Proportion Proportion
1 Shifting ownership to the private sector 25% 75%
2 Shifting Management Control to the private sector 2% 98%
The p-value for t-student test and 95% confidence interval for agreement proportion of these two indices are shown below:
One-Sample Test
Test Value = 0.5 95% Confidence Sig. Mean Interval of the t df Difference Difference (2-tailed) Lower Upper
Q11_1 -4.435 59 .000 -.25 -.36 -.14
Q11_2 -29.000 59 .000 -.48 -.52 -.45
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The results emphasize that none of considered shifting of ownership and management control to the private sector have been successfully accomplished.
If uncertainty about a government’s future policy is high, then private investors are likely to perceive that a small initial sale indicates the government does not intend to relinquish control (Perotti 1993). The interviewees confirm this idea in a way that the government foresees a strong uncertainty in case of strengthening the private sector. The interviewees contributed that whatever did happen during the pre-privatization and privatization stages of SOBs together with the defective results on transferring the ownership and management control, were basically because of the government intention to achieve the following results:
To claim that the privatization program coincided with the schedule of the Fourth Economic, Social and Cultural Development Plan of the Islamic Republic of Iran is accomplished.
To eliminate or decrease the accountability towards the privatized SOBs without losing the management control.
To strengthen the semi-government institutes as a part of strategy of subjugating the private sector.
3.6.2.5. The Probability of Re-selling Half of the Total Distributed Justice Shares
Since, the portion of Justice Shares (as a core idea of privatization plan in Iran) in any privatized SOEs (including the privatized SOBs) are not distributed to the individuals and as an allocated portion are under the management control of the government then, the aim of this question is to foresee the reaction or interest of the market toward the re-offering of this shares if/when they would be distributed to the identified individuals (table 3) by the individuals and be re-offered by them rather than the first
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hand offering by the government. Actually the later questions will more provide the next layers and different aspects related to the effect of Justice Shares in the success of privatized SOBs and the possible overcoming its side effects.
If the government takes an action towards its commitment to distribute the Justice Shares within the identified lower income deciles then, the re-selling of at least half of the distributed shares by the individuals is to be evaluated. This probability is included in question 12 of the questioner and the related responds have been collected by Likert Scale with the rating of:
1-Very little 2- Little 3- Moderate 4- Very 5-Very Much
The descriptive statistics and the related bar charts about the probability of re-selling the Justice Shares by the primary individual owners in case of realized distribution of the shares are shown as below.
Probability of Re-selling the Justice Shares by the Primary Individual Owners
35.0% 31.7% 30.0% 25.0% 25.0% 21.7% 20.0% 15.0% 15.0%
10.0% 6.7% 5.0%
0.0% ﺧﻴﻠﻲ زﻳﺎد زﻳﺎد ﻣﺘﻮﺳﻂ ﮐﻢ ﺧﻴﻠﻲ ﮐﻢ
To estimate the probability of re-selling function, an amount of probability weight is given to each choice to estimate the probability mean for testing. Therefore, the
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following probability weights are allocated to the new variable of tq12-p to each choice:
Very Little (0.1) Little (0.3) Moderate (0.5) Very (0.7) Very Much (0.9)
Assuming the P as the re-selling probability of the Justice Share, the related hypothesis will be defined as:
⎧⎧Hp00:= 0.5 Hp:−= 0.5 0 ⎨⎨ or ⎩⎩Hp11:0.5≠ Hp:0.50−≠
By the following table, the re-selling probability is equal to 60.7% with the standard deviation of 24%.
One- Sample Statistics
Std. Std. N Mean Error Deviation Mean tq12_p 60 .6067 .24277 .03134
The t-student test for the above hypothesis’s results is:
One- Sample Test
Test Value = 0.5 95% Confidence Sig. Mean Interval of the t df Difference Difference (2-tailed) Lower Upper tq12_p 3.403 59 .001 .10667 .0440 .1694
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The t-student test shows that the null hypothesis for 50% re-selling probability of half of the distributed Justice Shares is rejected and the re-selling probability with 95% confidence significantly will be more than 50%. Also, with considering the 95% confidence interval of difference between estimated probability and the figure of 0.5 in the above table, the re-selling probability of half of the Justice Shares after being distributed within the individuals and with 95% confidence will fluctuate within 54.4% and 66.9% as a considerable and indispensible amount.
3.6.2.6. The Tendency of Investor Groups to Buy the Re-offered Justice Shares
As far as the probability of re-selling the distributed Justice Shares has been resulted with a high estimated proportion then, it requires the estimate of the probable demands by the different existed groups of investors in the capital market for such a supply of the Justice Shares.
Generally, the major existed investor groups active in the capital market of Iran are classified into three main groups of: the private sector, semi-government institutes and, unofficial credit cooperatives. Then, the tendency of these three groups in buying the re-offered Justice Shares is evaluated in question 13 of the questioner and the responds have been collected by the rating of:
1-Very Little 2- Considerable 3- Very 4- Very Much
The following bar charts include the statistic description of tendency that the different investor groups may have towards re-offering the Justice Shares. Actually in this part the SOBs shares are included in the probable re-offered basket shares of Justice Shares. In fact, separately re-offering the share of privatized SOBs is only possible to be evaluated when it is re-offered by either the semi-government institutes or the diffused owners which will be latterly analyzed.
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Tendency of Private Sector to Buy the Re-offered Justice Shares
50.0% 45.0% 45.0% 40.0% 35.0% 31.7% 30.0% 25.0% 20.0% 15.0% 10.0% 10.0% 8.3% 5.0% 5.0% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎد زﻳﺎد ﻗﺎﺑﻞﻣﻼﺣﻈﻪ ﺧﻴﻠﻲ ﮐﻢ
Tendency of Semi-government Institutes to Buy the Re-offered Justice Shares
35.0% 31.7% 30.0% 26.7% 25.0% 21.7% 20.0%
15.0% 11.7% 10.0% 8.3%
5.0%
0.0%
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Tendency of Unofficial Credit Cooperatives to Buy the Re-offering Justice Shares
30.0% 28.3%
25.0% 23.3% 21.7% 20.0% 20.0%
15.0%
10.0% 6.7%
5.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎد زﻳﺎد ﻗﺎﺑﻞﻣﻼﺣﻈﻪ ﺧﻴﻠﻲ ﮐﻢ
For the tendency evaluation, we combine the choices to replace the multinomial distribution with the binominal distribution.
The choices of “Very” and “Very Much” will be assumed “tended”.
The choices of “very little” and “considerable” will be assumed “not tended”.
The proportion of the responds for the tendency is shown by p and the related hypothesis test will be:
⎧⎧Hp00:=− 0.5 Hp: 0.5= 0 ⎨⎨ or Hp:≠− 0.5 Hp: 0.5≠ 0 ⎩⎩11
Then the tendency estimation is shown in the following tables.
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One-Sample Statistic
Std. Std. N Mean Error Deviation Mean tq13_1 54 .1481 .35858 .04880 tq13_2 53 .5472 .50253 .06903 tq13_3 47 .3404 .47898 .06987
One-Sample Test
Test Value = 0.5 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper tq13_1 -7.211 53 .000 -.35185 -.4497 -.2540 tq13_2 .683 52 .497 .04717 -.0913 .1857 tq13_3 -2.284 46 .027 -.15957 -.3002 -.0189
The estimated results shows a high tendency of 54.7% for Semi-government institutes and a very low tendency of 14.8% for private sector and not considerable tendency of 34% for unofficial credit cooperatives to buy the assumed re-offered Justice Shares.
The t-student test results show that the null hypothesis for tendency of private sector and unofficial cooperatives with Minimum of 50%, is rejected with sufficient evident.
Also, there is not sufficient evident to reject null hypothesis for the tendency of Semi- government institutes. In other words, the above tests with 95% confidence demonstrate that despite of private sector and unofficial cooperatives, the Semi- government institutes would show a high tendency to buy the Justice Shares if they would be re-offered. 318
In this part, there will be a focus on the existence of tendency difference and its comparison between the three groups of private sector, Semi-government institutes and unofficial credit cooperatives to buy the re-offered Justice Shares.
Null hypothesis (H0): The buying tendency within the three groups is equal.
Alternative hypothesis (H1): The buying tendency within the three groups is not equal.
Here, the discrete data do not follow the normal distribution which is the main assumption for using ANOVA. So, the non-parametric method and the Kruskal- Wallis test will be utilized in this part. The reason is that when data are discrete, we can’t achieve the normality assumption for data and consequent independences. Thus, as a non-parametric test, the Kruskal-Wallis test will be used instead of ANOVA method (which needs normality, homogeneous variances and independence of data). So that, needless of implied assumptions, the method will demonstrate the existence or nonexistence of the difference among indices. The test result for the tendency difference of the above elements is as below:
Test Statistics (a,b)
Q13_Total Chi-Square 26.908 df 2 Asymp. Sig. .000
a Kruskal Wallis Test
b Grouping Variable: Group
In respect of p-value of the test, with 95% confidence, there is a significant difference in buying tendency for the re-offered Justice Shares within the three investor groups. In other words, the buying tendencies of all three groups are significantly different from each other. 319
After being confident of significant tendency difference, the multiple comparison tests could statistically demonstrate the amount of tendency difference of each group from the others and show the tendency of which group significantly is higher than the others. Before selecting the best test method for the multiple comparisons we should become confident whether the variances are equal or not. The Levene Test shows the equality result of the variance of data as bellow:
Test of Homogeneity of Variance
Q13_Total
Levene df1 df2 Sig. Statistic .864 2 151 .424
Regarding the p-value of the test the assumption of the equivalence of the variances is not rejected and the variance of the data can still be assumed equal.
By assuming the equivalence of the variances and the confident of tendency different for each investor group of the buyers, the Tukey HSD test for the multiple comparison of the tendency mean of the three groups shown as follow:
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Multiple Comparisons
Dependent variable: QB-Total
Mean 95% Confidence Interval (J) Std. (I) Group Difference Sig. Group Error Lower Upper (I-J) Bound Bound
2 -.994(*) .180 .000 -1.42 -.57 1 3 -.360 .186 .132 -.80 .08 Tukey HSD 2 1 .994(*) .180 .000 .57 1.42
3 .634(*) .187 .003 .19 1.08 3 1 .360 .186 .132 -.08 .80 2 -.634(*) .187 .003 -1.08 -.19 * The mean difference is significant at the .05 level.
Q13-Total
Subset for alpha = Group N .05 1 2 1 54 1.70 Tukey 3 47 2.06 HSD(a,b) 2 53 2.70 Sig. .128 1.000
Means for groups in homogeneous subsets are displayed.
a Uses Harmonic Mean Sample Size = 51.140.
b The group sizes are unequal. The harmonic mean of the group sizes is used. Type I error levels are not guaranteed.
The results of the above test demonstrate that with 95% confidence, the mean number tendency of semi-government institutes (shown as group 1) is different from those of
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the private sector (shown as group 2) and unofficial credit cooperatives (shown as group 3) and it is significantly higher than the others. On the other side, despite of different in the mean number of tendency between private sector and unofficial credit cooperatives, there is no significant statistical different where all shown in the above table.
In this subject the interviewees partly believed that the major reason for any tendency proportion of the unofficial credit cooperatives to participate in this segment of the market is to establish themselves as a stakeholder in the official and legal capital market activities and not because of the profitability of such an investment. The majority close to all of interviewees believe that the major reason for high tendency of semi-government institutes to participate in this segment of the market is firstly to support the shares value which in the counter condition would collapse the stock market with tremendous social consequences. Secondly, to prevent strengthening the private sector and expanding its involvement in economic activities that inevitably could result a political power for the private sector.
3.6.2.7. Shares Re-offering Probability by the Semi-governments Institutes.
The major share portion of the SOEs and SOBs during the procedure of privatization has been ceded to the semi-government institutes by this reasoning that in future they will re-offer these shares to the capital market in the benefit of private sector. The probability for occurring of such a claim for the shares of privatized SOBs during 2011-2015 by the end of the Fifth Economic and Social Development Plan is brought forth in question 14 of the questioner and the collection of evaluations has been done by the following choices:
1-None 2- Little 3- Moderate 4- Very
The descriptive statistics and related bar charts are as below:
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The Probability of Shares Re-offering by Semi-Government Institutes
45.0% 41.7% 40.0% 35.0% 30.0% 25.0% 23.3% 20.0% 20.0% 15.0% 15.0% 10.0% 5.0% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﻧﺴﺒﺘﺎ آﻤﻲ اﺻﻼ
To analyze the probability or improbability of re-offering the shares of privatized SOBs by semi-government institutes, the collected responds to the question 14 have been combined as the following:
“Moderate” and “Very” as probable (Code 1)
“None: and “Little” as improbable (Code 0)
Test value is assumed to be equal to 0.5 and the related hypothesis will be examined in the following tables
One-Sample Statistics
Std. Std. Error N Mean Deviation Mean
Q14 46 .1957 .40109 .05914
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One-Sample Test
Test Value = 0.5
95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper tq14 -5.147 45 .000 -.30435 -.4235 -.1852
On the base of t-student test results, the responders who believe that the shares re- offering by semi-government institutes is probable, are being estimated by the proportion of 19.6% which is significantly less than 50% (equivalent amount to H0). The 95% confidence interval for the probable responds is as follow:
8.6% < P < 31.5%
In other words, the responders who think that the share re-offering of privatized SOBs by semi-government institutes is probable may benefit the maximum proportion of 31.5% with the confidence of 95%.
On the other hand, with allocating the assumed probabilities in bellow to the selected choices, the probability of re-offering will be estimated.
1-None (0.125) 2- Little (0.375) 3- Moderate (0.625) 4-Very (0.875)
The probability of re-offering the shares privatized SOBs’ by the semi-government institutes is P and the hypothesis will be shown as:
⎧⎧Hp00:= 0.5 Hp:−= 0.5 0 ⎨⎨ or Hp:0.5≠ Hp:0.50−≠ ⎩⎩11
The statistics analysis result is shown as:
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One-Sample Statistics
Std. Std. N Mean Error Deviation Mean tq14_p 46 .3587 .16999 .02506
One-Sample Test
Test Value = 0.5 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper tq14_p -5.638 45 .000 -.14130 -.1918 -.0908
The probability of share re-offering of privatized SOBs by semi-government institutes is estimated around 35.9% with the standard deviation of 17%.
The t-student test result shows that the null hypothesis for the probability of share re- offering with 95% confidence is rejected and it will be significantly less than 50%. The 95% confidence interval to estimate the probability will be as:
30.8% < P < 40.4%
It means that the responders predict that under present circumstances the semi- government institute may not re-offer their owned shares.
The contribution of the interviewees was not different from the above result and the portion of “no answer” belongs to all the responders who had no confidence or prediction in continuation of the present situation of the country till the end of the period of 2011-2015.
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3.6.2.8. Post-privatization Performance changes of privatized SOBs
The performance change of the SOBs after privatization will be studied through question 17 of the questioner including the following factors:
1- Profit increase
2- Cost reduction
3- E-banking expansion
4- New products providing
5- Implementing more of more competitive policies
6- Applying more international banking standards
7- Applying financial policies based on the Trade-Law of private companies
8- Reduction of government’s intervention
Generally, in the banking system of the country, the two factors of “e-banking expansion” and “new products providing” specifically have benefited of the considerable growth in both private and state-owned banks and consequently they have been considered as the minor factors. Therefore, the study of the remaining factors by excluding the aforementioned two factors will be also regarded.
The responds were collected by Likert scale with the ranking from1 to 5 as:
1-Imprecetible 2- Little 3- Normal 4- Very 5- Very Much
The descriptive statistics for the responds related to the change portion of performance factors of the SOBs after privatization are shown in the eight consequent following bar charts. 326
Profit Increase
60.0%
48.3% 50.0%
40.0%
30.0%
18.3% 20.0% 16.7% 13.3% 10.0% 1.7% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻋﺎدي ﮐﻤﻲ ﻧﺎﻣﺤﺴﻮس
Cost Reduction
35.0% 33.3% 33.3%
30.0%
25.0%
20.0% 15.0% 15.0% 13.3%
10.0%
5.0% 3.3% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻋﺎدي ﮐﻤﻲ ﻧﺎﻣﺤﺴﻮس
327
E-banking Expansion
60.0%
48.3% 50.0%
40.0% 30.0% 30.0%
20.0% 11.7% 10.0% 6.7% 1.7% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻋﺎدي ﮐﻤﻲ ﻧﺎﻣﺤﺴﻮس
New Products Providing
50.0% 46.7% 45.0% 40.0% 35.0% 33.3% 30.0% 25.0% 20.0% 15.0% 13.3% 10.0% 5.0% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻋﺎدي ﮐﻤﻲ
328
More Applying of Competitive Policies
35.0% 33.3%
30.0% 26.7% 25.0% 23.3%
20.0%
15.0%
10.0% 6.7% 6.7% 5.0% 3.3%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻋﺎدي ﮐﻤﻲ ﻧﺎﻣﺤﺴﻮس
More Apply of International Banking Standards
45.0% 40.0% 38.3% 35.0% 30.0% 25.0% 25.0% 20.0% 20.0%
15.0% 11.7% 10.0% 3.3% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻋﺎدي ﮐﻤﻲ ﻧﺎﻣﺤﺴﻮس
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More Apply of Financial Policies Based on the Private Firm’s Trade-Law
45.0% 40.0% 38.3% 35.0% 30.0% 30.0% 25.0% 20.0% 20.0% 15.0% 10.0% 5.0% 5.0% 3.3% 3.3% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻋﺎدي ﮐﻤﻲ ﻧﺎﻣﺤﺴﻮس
Reduction of Government`s Intervention
60.0% 56.7%
50.0%
40.0%
30.0% 21.7% 20.0% 13.3%
10.0% 5.0% 1.7% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻋﺎدي ﮐﻤﻲ ﻧﺎﻣﺤﺴﻮس
For mean evaluation change of performance in all eight factors we assume the mean score of 8 aforementioned indices as the main index for the performance change of SOBs after privatization then, the analyzed results will be as below:
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One- Sample Statistics
Std. td. Error N Mean Deviation Mean Averageq17 60 2.8726 .75075 .09692
One-Sample Test
Test Value = 3
95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper Averageq17 -1.314 59 .194 -.12738 -.3213 .0666
The results of the above tables show that the mean score of performance change of the SOBs after privatization will be 2.87 out of 5 that would have no significant different with the amount of t-test with score of 3 (normal choice). Therefore, it could be said that the mean performance change of the SOBs after privatization will be normal or less than the normal.
By eliminating the two minor factors of “e-banking expansion” and “new products providing” of the total performance factors then, the result will be as is shown in the following tables:
One-Sample Statistics
Std. Std. N Mean Error Deviation Mean aveq17_3 59 2.8186 .68477 .08915 aveq17_3_4 59 2.7353 .72107 .09388
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One-Sample Test
Test Value = 3 95% Confidence
Sig. Mean Interval of the t df (2-tailed) Difference Difference
Lower Upper aveq17_3 -2.035 58 .046 -.18144 -.3599 -.0030 aveq17_3_4 -2.820 58 .007 -.26469 -.4526 -.0768
By eliminating the minor factors of “e-banking expansion” the mean score of performance change for privatized SOBs will decline to 2.82 out of 5 and by coincident elimination of two minor factors of “e-banking expansion” and “New products providing”, the mean score of performance change for privatized SOBs will decline to 2.73out of 5. On the other hand, by respecting the p-value of t-test (0.046 and 0.007 in column “Sig”), both new estimated mean scores have significant difference with the normal condition (score of 3). Therefore, with one factor elimination or two coincident factors elimination the mean score of the other performance indices of the privatized SOBs would be significantly less than the normal condition.
In the next step of analysis, it is important to identify difference between each of the performance factors after privatization and finding that which factor includes the most or the least change. The hypothesis in this part will be assumed as:
Null hypothesis (H0): The proportion of change in the banks’ performance factors is equal after privatization.
Alternative hypothesis (H1): At least for one of the banks’ performance factor, the proportion of change is different after privatization.
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Regarding the discrete collected data about each factor it is not useful to apply the variance analysis methods. Meanwhile, the non-parametric Kruskal- Wallis ranking test will be applied.
The test result and mean rank to identify the existence of differences within the proportion of performance factors are shown below.
Ranks
Mean Group N Rank 59 219.30 2 58 182.41 59 326.81 4 59 284.00 Q17_Total 58 247.90 59 216.86 7 57 258.50 8 59 140.38 Total 468
Test Statistics (a,b)
Q17_Total Chi-Square 83.651 df 7 Asymp. Sig. .000
The results in table of mean ranks specifically witness the differences where the factor of “government’s intervention reduction” benefits the lowest rank and the “e- banking expansion” gets the highest. Once more, if we eliminate the two factors of “e-banking” and new “products providing” then, the ranking will in orderly start from “applying financial policies”, “applying international standards”, “increase of
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profitability” and “implementing more of competitive policies”. Reciprocally, the responder indicated their least confirmation to any reduction in banking cost and government’s intervention. The test results with regarding the p-value there is a sufficient evidence to reject the null hypothesis (equal change proportion for all the performance factors) and consequently confirm the existence of difference within the change portion of the performance factors. In other words, there at least is one performance factor with significant difference with the others.
After statistical proof of significant difference within the change portion of performance factors of privatized SOBs, it will be useful to utilize the multiple comparison test for grouping and identifying the least and the most change portion within the performance factors. The Levene test (below) shows the variance homogeneity of the data for each factor.
Test of Homogeneity of Variances
Q17_Total
Levene df1 df2 Sig. Statistic 1.322 7 460 .238
According to the p-value, the homogeneity of the variances has not been rejected. Therefore, by assuming the variances homogeneity of data for all the factors and confidence for existing difference within the change portion of performance factors for privatized SOBs, the Tukey HSD test for multiple comparison of mean changes is implemented as shown in table below.
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Q17_Total
Subset for alpha = .05 Group N 1 2 3 4 5 8 59 2.24 2 58 2.52 2.52 1 59 2.78 2.78 6 59 2.78 2.78 Tukey 5 58 3.03 3.03 3.03 HSD(a,b) 7 57 3.11 3.11 4 59 3.31 3.31 3 59 3.63 Sig. .724 .052 .545 .758 .559
The results of multiple comparison test demonstrate that after privatization, there would be the least change proportion for the factor 8 which is “government`s intervention reduction” and factor 3 as “e-banking expansion” would benefit the highest change proportion after privatization. The factors 2, 1, 6, 5, 7, and 4 (in order of lowest to the highest) with some significant differences would be in the middle of the changes proportion interval.
The summary of the interviewees` contributions in more detailed consistency with the above results are being classified as below:
E-banking expansion will be occurred firstly because it is not avoidable and secondly because the managements of any privatized SOBs would outstand it as their performance success. But the important issue in this competitive performance is the matter of trading cost. In other words, the e-banking expansion will be done but no matter to what price.
E-banking expansion will be a superficial improvement till the time of benefiting the process of e-signing that demands the high profile security applications. 335
Increase in profitability is easy to be created in a monopoly situation but yet, in the existed condition of the privatized SOBs it would be possible to show any profit increase mainly through the book buildings in the absence of the necessary observation authority of the Central Bank.
Providing the new products would happen not because of services upgrading but mainly to escape of limiting legal barriers.
There is no reason to expect any reduction in government`s intervention when the management of the privatized banks are directly under the dominance of the government.
3.6.2.9. The Conformity of Private Banking of Iran with the Current Country’s Potentialities and International Banking Standards
The conformity of private banking in Iran with the current potentialities and international standards is an important issue in the direction of studying the success condition for continuation of private and privatized bank. Despite many industries, the banking industry cannot benefit preserved success unless be linked with the international network. Such a linkage is only possible when it has the homogeneity and regular linkage with the current international conditions and disciplines as much as possible. On the other hand, we presume that the concept of “potentiality” is far ahead of the “standard” and there are the unconditional potentialities for banking system to upgrade its position and be linked with the international banking network. Therefore, the factors 2, 3, 4and 6 are being presumed as the regular banking standards and factors 1, 5, 7, 8, 9, 10 and 11 are being considered as current banking potentialities.
To investigate the existing private banking condition in Iran, compared with the minimum current international potentialities and standards, there have been 11 factors set for the evaluation in question 18 of the questioner and the responders have evaluated them with the following ranking scale.
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1-None 2- Little 3- Moderate 4- Very 5-Very Much
Factor 6 (enjoying the infrastructures of e-banking) is considered as a minor index and the statistical analysis will be done with/without it.
The mentioned factors in question 18 are:
1- Enjoying stability in government’s economic decisions and policies.
2- Independent observation by the Central Bank
3- Improved banking laws and regulations
4- Competitive condition in banking industry
5- Competition in capital market through diversification
6- Enjoying related infrastructure of e-banking expansion
7- Foreign owners
8- Expansion of banking operation abroad
9- Expansion of bank’s Investment abroad
10- Ranking tendency by credible international institutes
11- Presence of international auditors and consultants in banking affairs
The following bar charts provide the descriptive statistics of the responds for each proportion index of enjoying the current potentialities and standards.
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Enjoying Stability in Government’s Economic Decisions and Policies
60.0% 55.0%
50.0%
40.0%
28.3% 30.0%
20.0% 10.0% 10.0% 5.0% 1.7% 0.0% ﺑﻲ answer ﭘﺎﺳﺦy Noزﻳﺎد Ver ﺗﺎﺣﺪودي Moderate ﮐﻤﻲ Little اﺻﻼNone
Independent Observation by the Central Bank
45.0% 40.0% 40.0% 35.0% 30.0% 28.3% 25.0% 20.0% 18.3% 15.0% 10.0% 10.0% 5.0% 3.3% 0.0% ﺑﻲ ﭘﺎﺳﺦ زﻳﺎدﺧﻴﻠﻲ زﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ
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Improved Banking Laws and Regulations
60.0% 51.7% 50.0%
40.0% 31.7% 30.0%
20.0% 11.7% 10.0% 3.3% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
Competitive Conditions in Banking Industry
60.0% 50.0% 50.0%
40.0% 33.3% 30.0%
20.0% 10.0% 10.0% 3.3% 1.7% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
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Competition in Capital Market through Diversification
50.0% 45.0% 43.3% 40.0% 35.0% 30.0% 25.0% 25.0% 21.7% 20.0% 15.0% 10.0% 5.0% 3.3% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
Enjoying the E-banking Expansion Infrastructure
60.0%
48.3% 50.0%
40.0% 30.0% 30.0%
20.0% 16.7%
10.0% 3.3% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ زﻳﺎدﺧﻴﻠﻲ زﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ
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Enjoying the Foreign Owners in Shareholder Combination
50.0% 46.7% 45.0% 40.0% 36.7% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 8.3% 3.3% 3.3% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
Expansion of Banking Operation Abroad
45.0% 41.7% 40.0% 35.0%
30.0% 26.7% 25.0% 21.7% 20.0% 15.0% 10.0% 5.0% 3.3% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
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Expansion of Investment Abroad
50.0% 45.0% 43.3% 40.0% 35.0% 30.0% 26.7% 25.0% 20.0% 18.3% 15.0% 10.0% 6.7% 3.3% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
Ranking Tendency by Credible International Institutes
35.0% 33.3%
30.0% 26.7% 25.0% 23.3%
20.0%
15.0% 11.7% 10.0%
5.0% 3.3% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﮐﻤﻲ ﺗﺎﺣﺪودي اﺻﻼ
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Presence of International Auditors and Consultants in Banking Affairs
35.0% 33.3% 31.7% 30.0%
25.0% 21.7% 20.0%
15.0%
10.0% 6.7% 5.0% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
For general evaluation of enjoyment proportion of private banks the mean of aforementioned indices will be considered as the general index. We show the mean score of 11 indices by “Average” and the related hypothesis will be:
Null hypothesis (H0): Enjoying the current potentialities and international standards by the private banks is at the medium bound (score 3).
Alternative hypothesis (H1): Enjoying the current potentialities and international standards by private banks is not at the medium bound (score 3).
Accordingly, the results of analysis will be as below:
One-Sample Statistics
Std. Std. N Mean Error Deviation Mean Average 59 2.4134 .53503 .06965
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One-Sample Test
Test Value = 3
95% Confidence Sig. t df Difference Interval of the (2-tailed) Difference
Average -8.422 58 .000 -.58659 -.7260 -.4472
Regarding the results of above tables, the score of 2.4 is estimated for the mean enjoyment proportion score of potentialities and standards by private banks.
The t-student test result and p-value of type-one error, show that the null hypothesis is rejected and the estimation has a significant difference with the mean proportion (score= 3) and the enjoyment proportion is not at the medium bound. Also, noticing the estimated result of 95% confidence indicate that the mean proportion of enjoyment of private banks from current potentialities and international standards with 95 % confidence interval is in the interval of 2.55-2.27 which is the evaluation indication of being between “Little” and “Moderate” enjoyment proportion. By eliminating the factor 6 (enjoying the infrastructure of e-banking expansions) as a minor index, the change in above result is demonstrated in the following tables.
One-Sample Statistics
Std. Std. N Mean Error Deviation Mean aveq18_6 59 2.3337 .54992 .07159
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One-Sample Test
Test Value = 3 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper aveq18_6 -9.306 58 .000 -.66627 -.8096 -.5230
Elimination of factor 6 reveals that the mean proportion will decline from 2.4 to 2.33 and confirms more significant difference with the medium bound of “Moderate”.
Also, by elimination of factor 6 with 95% confidence the enjoyment proportion would be placed in the interval of 2.19-2.48.
The next step will be investigating the difference of mean score of each index and their ranking. The related hypothesis will be as:
Null hypothesis (H0): The indices’ mean of enjoying the current possibilities and international standards by private banks are equal.
Alternative hypothesis (H1): At least the mean proportion of one index of enjoying the current possibilities and international standards is different from the other indices.
According to the discrete data and not possessing the normality, we apply the non- parametric test of Kruskal-Wallis and the results for the indices would be shown in the following tables.
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Ranks
Mean Group N Rank 1 57 213.89 2 58 432.78 3 59 386.08 4 59 383.17 5 58 368.75 6 59 462.32 Q18_Total 7 58 189.40 8 58 261.86 9 58 260.41 10 53 261.60 11 56 253.13 Total 633
Test Statistics (a,b)
Q18_Total Chi-Square 164.771 df 10 Asymp. Sig. .000
The p-value demonstrates that with more than 95% confidence (close to 100%) the null hypothesis is rejected and at least one of the indices is different from the others or definitely the enjoyment proportions of the indices are different. By the resulted confidence in differentiation of the enjoyment proportions, the results of Levene test for testing the homogeneity of the variances of the data for each index shown in the following table.
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Test of Homogeneity of Variances
Q18_Total
Levene df1 df2 Sig. Statistic 1.600 10 622 .103
The test result reveals the homogeneity of variances for the data of different indices is not rejected and the equivalence of the variances is acceptable. The Tukey HSD test ranks the means in the following table.
Q18_Total
Subset for alpha = .05 Group N 1 2 3 4
Tukey 7 58 1.7 HSD(a,b) 1 57 1.84 11 56 2.05 10 53 2.09 8 58 2.10 9 58 2.10 5 58 2.71 3 59 2.73 4 59 2.73 2 58 3.10 6 59 3.20 Sig. .407 .081
In the test the mean proportion of different enjoying indices is classified in two groups.
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Group 1: including the indices of 7, 1, 11, 10, 8 and 9 (all in the banking potentialities category) in order of less proportion score of enjoying the current potentialities and international standards. Meanwhile, the Tukey test result does not show any significant difference within the proportion of indices. The index 7 (foreign owner in shareholder combination) has the least mean score of enjoyment.
Group 2: including the indices of 5, 3, 4, 2 and 6 in order of less to the more (all in the banking standards except factor 5) have the most mean score of enjoyment. Meanwhile, there is no indication of significant difference.
In sum, the results indicate that the existing condition of private banking in Iran benefits very little of the banking potentialities that could be utilized and furthermore there is not significant evidence of implementing the regular banking standards.
By ignoring the minor index 6, the index 2 (independent observation by the Central Bank), has the highest mean score if enjoyment.
The indices of the mentioned two groups have specifically, significant difference from each other and the mean score of group 1 is significantly less than the mean score of group 2.
The main contributed considerations of the interviewees are classified as follow:
Although the independency of the Central Bank as an observer regulatory body has a high importance yet, it is not only far away of such an independency but also its general structure in a broad sense does not have the capability of independent observation and regulation.
Not improved banking laws and regulation which also benefit of high importance emanates of aforesaid infirmity of the Central Bank.
Participation of foreign investors in banks’ ownership is possible only if the government behavior and policies changes towards being linked to the 348
international banking system. Reciprocally, if it happens then, all the cases related to expansion of operation and investment activities of banks in abroad, ranking by international institutes, consultancy of international auditors with many other potentialities will be placed in the expected normal situation with positive effects on the banking industry of the country.
In the condition of confronting the day to day economic decision making and shock therapy interest in policy making, addition to the continues government`s intervention, the frustrated domestic investors will avoid of showing significant excitement for investing in banking industry which coincidentally is a red signal for the foreign investors to hesitate of entering such a market.
3.6.2.10. The Effective Factors in Performance Improvement of Private Banks
Here, we will examine the factors that may have an impact on upgrading and improvement of the private banks’ performance and also their effective proportion will be compared. The 10 selected factors in question 19 are:
1- Competition opportunity
2- Free activation of social fundamental institutes
3- Presence of foreign banks
4- Independency of Central Bank
5- Eliminate the 5% ownership restriction for private sector
6- E-banking expansion
7- Increasing the number of small private banks
8- Merging small private banks 349
9- More private banks established by Semi-government institutes
10- Participation of foreign investors in shareholders combination
Note: The factor 5 of “eliminate the 5% ownership restriction for private sector” refers to the circular No. 7038 dated 1388/1/19 (8 April 2010) of the Central Bank where states that each individual is not allowed to own more than 5% of total shares in private bank and all the individuals in one family group cannot have more than one chair in the bank`s board of director disregarding the amount of their total ownership.
The responders have evaluated the effective proportion of each index in the 5 choices of Likert scale ranking as:
1-None 2- Little 3- Moderate 4- Very 5- Very Much
The following bar charts for each index provide the descriptive statistic of the responds on the evaluation of effective factors for performance improvement of private banks.
Competition Opportunity
50.0% 46.7% 45.0% 40.0% 35.0% 35.0% 30.0% 25.0% 20.0% 16.7% 15.0% 10.0% 5.0% 1.7% 0.0% ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ
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Free Activation of Social Fundamental Institutes
40.0% 36.7% 35.0% 28.3% 30.0% 26.7% 25.0%
20.0%
15.0%
10.0% 5.0% 5.0% 1.7% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
Presence of Foreign Banks
50.0% 46.7% 45.0% 40.0% 35.0% 33.3% 30.0% 25.0% 20.0% 15.0% 15.0% 10.0% 5.0% 5.0% 0.0% ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ
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Independency of Central Bank
60.0%
48.3% 50.0%
40.0% 33.3% 30.0%
20.0% 15.0%
10.0% 1.7% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ زﻳﺎدﺧﻴﻠﻲ زﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ
Eliminate the 5% Ownership Restriction for Private Sector
45.0% 40.0% 38.3% 35.0% 30.0% 25.0% 23.3% 20.0% 15.0% 15.0% 11.7% 10.0% 6.7% 5.0% 5.0% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
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E-banking Expansion
50.0% 45.0% 45.0% 40.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 11.7% 10.0% 5.0% 3.3% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎد زﻳﺎد ﺗﺎﺣﺪودي
Establishing More Private Banks by Semi-government Institutes
45.0%
40.0% 38.3%
35.0%
30.0%
25.0% 20.0% 20.0% 20.0% 18.3%
15.0% 10.0%
5.0% 1.7% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
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Increasing the Number of Small Private Banks
40.0% 35.0% 35.0%
30.0% 28.3%
25.0%
20.0% 16.7% 16.7% 15.0%
10.0%
5.0% 3.3%
0.0% زﻳﺎدﺧﻴﻠﻲ زﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
Merging Small Private Banks
60.0%
48.3% 50.0%
40.0%
30.0% 26.7%
20.0% 15.0%
10.0% 5.0% 5.0%
0.0% ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﺗﺎﺣﺪودي ﮐﻤﻲ اﺻﻼ
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Participation of Foreign Investors in Shareholders Combination
50.0% 45.0% 45.0% 43.3% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 10.0% 5.0% 1.7% 0.0% ﺧﻴﻠﻲ زﻳﺎد زﻳﺎد ﺗﺎﺣﺪودي اﺻﻼ
The bar charts demonstrate that more than 80% have evaluated the five factors of 1, 3, 4, 6 and 10 as “Very” or “Very Much” effective in performance improving of private banks. Regarding that effectiveness of competition opportunity, independency of Central Bank and e-banking expansion are a general rules and are not only limited to the banking industry of Iran then, the distinctive high effective factors for Iran’s banking system would be the presence of foreign banks (factor 3) and participation of foreign investors in shareholders combination (factor 10).
We will estimate the proportion of the responds who evaluate the index as “Very” and “Very Much”.
Assume that P is proportion of these responding in each of the 10 factors of question 19. Then, the related hypothesis will be:
⎧⎧Hp00:=− 0.4 Hp: 0.4= 0 ⎨⎨ or Hp:0.4≠−Hp:0.40≠ ⎩⎩11
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The selection of 0.4 (or 40%) is because in normal condition if there is no significant difference within the effective proportions. Then, all the choices including “Very” and “Very Much” should have the proportion of 0.2.
Estimate of responds proportion
No. Factor Very – None – Little- Very Much moderate
1 Competition opportunity 82% 18%
2 Free activation of social fundamental institutes 63% 37%
3 Presence of foreign banks 80% 20%
4 Independency of Central Bank 83% 17%
Eliminate the 5% ownership restriction for 5 50% 50% private sector
6 E-banking expansion 85% 15%
7 Increasing the number of small private banks 20% 80%
8 Merging small private banks 20% 20%
More private banks established by Semi- 9 63% 37% government institutes T h Participation of foreign investors in 10 88% 12% e shareholders combination r efore, in normal condition the responds of “Very” and “Very Much” together should have the proportion of 40% of the total responds and if their proportion would be less 356
or more than that, the null hypothesis will be rejected and the effective proportion of these indices will be identified.
Proportion estimation for the responds of “vERY” and “Very Much” is shown in the table below:
Once more, within the ten different effective factors, the five factors (10, 6, 4, 1 and 3) with more than 80% responds of “Very” and “Very Much” are the most effective factors in performance improvement of private banks. On the contrary, the factors 7 and 8 will probably have the least effect on the performance improvement.
The results for the responds of “Very” and “Very Much” are shown as below:
One-Sample Test
Test Value = 0.4 95% Confidence
Sig. Mean Interval of the t df (2-tailed) Difference Difference
Lower Upper
Q19_1 8.271 59 .000 .417 .32 .52 Q19_2 3.719 59 .000 .233 .11 .36
Q19_3 7.681 59 .000 .400 .30 .50 Q19_4 8.931 59 .000 .433 .34 .53 Q19_5 1.536 59 .130 .100 -.03 .23 Q19_6 9.680 59 .000 .450 .36 .54 Q19_7 -3.841 59 .000 -.200 -.30 -.10 Q19_8 -3.841 59 .000 -.200 -.30 -.10 Q19_9 3.719 59 .000 .233 .11 .36 Q19_10 11.565 59 .000 .483 .40 .57
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Proportion Estimation
Very-Very Much None-Moderate- Little Factor No. Lower Upper Lower Upper Bound Bound Bound Bound
1 Competition opportunity 72% 92% 8% 28%
Free activation of social fundamental 2 51% 76% 24% 49% institutes
3 Presence of foreign banks 70% 90% 10% 30%
4 Independency of Central Bank 74% 93% 7% 26%
Eliminate the 5% ownership 5 37% 63% 37% 63% restriction for private sector
6 E-banking expansion 76% 94% 6% 24%
Increasing the number of small 7 10% 30% 70% 90% private banks
8 Merging small private banks 10% 30% 70% 90%
More private banks established by 9 41% 76% 24% 59% Semi-government institutes
Participation of foreign investors in 10 80% 97% 3% 20% shareholders combination
The results of t-student test indicate that the null hypothesis has been rejected for all the factors excluding the factor 5 (eliminate the 5% ownership restriction for private sector) and the responds proportion of “Very” and “Very Much” is different from 40% (in null hypothesis). This difference in some factors in an indication of being
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more than 0.4. For identifying the two mentioned for the difference of indication, the confidence interval for the difference of responds “Very” and “Very Much” with 40% or (p-0.4) is shown in the table below:
Regarding the results of above table the confidence interval of all the factors excluding factors 5, 7 and 8 have the lower bounds more than 40% that indicate the statistical proportions of selected responds are significantly more than 40%. Similarly, as the upper bound of confidence interval for the factors 7 and 8 are less than 40% then, statistically, the proportion of responders who evaluate these factors as an effective factor, are significantly less than 40%.
On the other hand, the Kruskal-Wallis test as below shows that with 99% confidence the proportion of effectiveness of all the effective factors in question 19 are different from each other.
Ranks
Mean Group N Rank q19_Total 1 60 373.03 59 323.08 60 367.69 59 379.90 57 241.30 58 374.17 59 124.42 60 129.17 60 274.73
60 376.31
592
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Test Statistics (a,b)
q19_Total Chi-Square 202.068 df 9 Asymp. Sig. .000
Focusing on the mean ranking reveals that potentially, the factors 7 and 8 probably would have the least effect and factors 10, 4, 6 and 1 would have the most effect on the performance improvement of private banks.
Test of Homogeneity of Variances
Q19_Total
Levene df1 df2 Sig. Statistic 5.589 9 582 .000
According to the p-value of the test and rejecting the homogeneity of variances within the different factors, the Tamhane’s T2 test will be applied to identify the least and the most effective factors.
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Q19_Total
Subset for alpha = .05 Group N 1 2 3 4 7 59 2.24 8 60 2.32 5 57 3.35 9 60 3.63 3.63 2 59 3.93 3.93 Tamhane 3 60 4.22 (a,b) 1 60 4.27 10 60 4.28 6 58 4.29 4 59 4.31 Sig. 1.000 .844 .794 .511
Once more, the results of the Tamhane’s T2 test indicate that:
1- The mean scores of the factors 9 and 7 including “more private banks established by semi-government institutes” and “increasing the number of small private banks” are statistically equal to the least effect on the performance improvement of private banks.
2- In the next level, mean scores of the factors5, 8 and 2 including “eliminate the 5% ownership restriction for private sector”, “merging the small private banks” and “free activation of social fundamental institutes” are statistically equal and have the medium effect on the performance improvement of private banking.
3- The factors 3, 1, 10, 6 and 4 including “presence of foreign banks”, “competition opportunity” and “participation of foreign investors in ownership combination”, “e-banking expansion” and “independent observation of Central Bank” all with the higher mean scores are statistically equal and have the most influence on the performance important of private banks. 361
The interviewees emphasized that:
The competition opportunity is the factor that can be generalized for any industry in any country and it cannot specifically characterize the private banking condition in Iran. Similarly the independent observation by the Central Bank is a usual case in banking industry. Close to all of the interviewees were redoubtable proponents of the vast and deep effect of factors 10 and 3 including the participation of foreign investors in shareholder combination and the presence of foreign banks activities in the banking system of the country. A high majority of the interviewees refuse the positive effect of eliminating the 5% private sector’s ownership restriction in banking system indicating that country’s situation is so susceptible for its following corruption consequences.
3.6.2.11. Preventive Factors of Foreign Investors Attraction
Now that the importance of foreign investors in banking ownership is revealed, it requires noticing the reason of their absence in the banking system of Iran. In other words, it becomes necessary to examine the impact of preventive factors on the attractions of foreign investors. In question 19-2 there is listed six barriers as follow to be evaluated:
1- Legal barriers
2- Unstable security in the region
3- Political condition in Iran
4- Unstable economic decision makings by government
5- Investment insecurity in Iran
6- Authority of “Vali-e Faghih” in the matter of property right.
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Note: Vali-e Faghih is a saintly jurisprudent to guard the Islamic Laws and Traditions with the full authority of ownership divesting.
The data has been collected with the following ranking of Likert Scale:
1-None 2- Little 3- Moderate 4- Very 5- Very Much
The six following bar charts illustrate the descriptive statistics for the evaluating responds to the impact of preventive factors in attracting the foreign investors.
Legal Barriers
30.0% 28.3%
25.0% 21.7% 20.0% 20.0%
15.0% 11.7% 10.0% 10.0% 8.3%
5.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻢ اﺻﻼ
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Unstable Security in the Region
40.0% 36.7% 35.0%
30.0%
25.0% 20.0% 20.0% 18.3%
15.0% 11.7% 10.0% 8.3% 5.0% 5.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻢ اﺻﻼ
Political Condition in Iran
70.0% 61.7% 60.0%
50.0%
40.0%
30.0% 21.7% 20.0% 8.3% 10.0% 3.3% 3.3% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻢ اﺻﻼ
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Unstable Economic Decision Makings by Government
60.0%
48.3% 50.0%
40.0% 31.7% 30.0%
20.0%
8.3% 10.0% 6.7% 1.7% 3.3% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻢ اﺻﻼ
Investment Insecurity in Iran
40.0% 35.0% 35.0% 31.7% 30.0%
25.0%
20.0%
15.0% 13.3% 10.0% 10.0% 8.3%
5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻢ اﺻﻼ
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Authority of “Vali-e Faghih” in the Matter of Property Right
30.0% 25.0% 25.0% 23.3% 23.3%
20.0% 15.0% 15.0% 10.0% 10.0%
5.0% 3.3%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻢ اﺻﻼ
Before comparing the prevention intensity of each factor, the difference of prevention intensity should be identified.
The related hypothesis test will be:
Null hypothesis (H0): The mean prevention portion in attracting the foreign investors will be equal for all the factors.
Alternative hypothesis (H1): At least, the mean prevention portion of one factor in attracting the foreign investors will be different from the other factors.
The results of Kruskal-Wallis test for the above hypothesis are shown in the following tables.
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Ranks
Mean Group N Rank Q19_2total 1 55 133.57 55 152.85 55 205.33 55 188.25 55 160.57 46 118.47 Total 321
Test Statistics (a,b)
Q19_2total Chi-Square 35.934 df 5 Asymp. Sig. .000
The mean ranks show that the factors 3 and 4 including “political condition in Iran” and “unstable economic decision makings by government” may probably have the most prevention intensity in attraction of foreign investors. And the null hypothesis
(H0) is rejected with 99% confident and all the factors have different prevention intensity from each other. Also, the Levene test for the homogeneity of the variances has been applied and according to the p-value shown in the following table, the variances of the data for the different factors are not homogeneous.
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Test of Homogeneity of Variances
Q19_2total
Levene df1 df2 Sig. Statistic 11.651 5 315 .000
The result of multiple comparisons testing by the Tamhane’s T2 test is shown in the table below.
Q19_2total
Subset for alpha = .05 Group N 1 2 3 4 6 46 3.0870 1 55 3.4909 3.4909 2 55 3.7818 3.7818 Tamhane (a,b) 5 55 3.9636 3.9636 3.9636 4 55 4.3273 4.3273 3 55 4.4727 Sig. .512 .330 .182 .249
The aforementioned results indicate that with 95% confident, the political condition in Iran” with the mean rank of prevention score of 4.47 has the most preventive intensity and statistically is significantly bigger than the factors 6, 1 and 2. On the other hand, the factor 6 of “authority of Vali-e Faghih in property right” with the mean score of 3.09 is significantly smaller than the others and has the least preventive effect on attraction of foreign investors.
The contributions of the interviewees about the most and the least preventive factors in attraction of foreign investors can be described as follow:
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By political condition means the political positioning especially in foreign affairs that caused the existed imposed sanctions and particularly the disconnection of country’s banking system with the international market. Consequently, such an operation boundaries would leave no interest or reason for the foreign investor’s participation in banking industry.
Close to all the 23.3% responds of “no answer” in the related bar chart belongs to the responders who believed the intensity value of the factor 6 “ authority of Vali-e Faghih in property right” as “Very” or “Very Much” but hesitated to documented their opinion. Otherwise, if they could have felt free, then the main part of “no answer” would have been shifted to either “Very” or “Very Much” proportions.
3.6.2.12. Evaluation the Methods to Management Transfer of Privatized SOBs to the Private Sector with no Change in the Ownership Structure
When the privatized SOBs are still being controlled by the government then, they should be considered as a powerful political tool for the government (Shleifer and Vishny, 1994 and Verbrugge et al., 1999) that one of their benefits is to channel funds that cover the losses of other state-owned enterprises (Claessens and Djankov, 1998, and Bortolotti et al., 2004). Additionally most often, the governments with less stability either are unable to accept the political risk of SOBs privatization (Clarke and Cull, 2002, Boehmer et al., 2005 and Megginson, 2005) or unwilling to relinquish their control on the privatized SOBs similar to the case of Iran. As one of the main focuses of this thesis is the government control of the privatized SOBs then, it becomes one of the main issues needs a basic thoughts and solution. According to the reluctance of the government in ceding the control of the privatized SOBs then, finding the appropriate method for shifting the management to the private sector is a hard task. It is as hard as expecting a basic change in the present ownership combination of privatized SOBs. Then the probable methods in this part are being proposed with the assumption of no change in the ownership combination to make them practical as possible. Clearly, the main objective of this part is to compare the 369
appropriation of each proposed method with the objective of shifting the management control.
The proposed methods for shifting the management control of the privatized SOBs from the government to the private sector include:
1- Continuation of present condition with distributing the Justice Shares to the individuals
2- Management Contract with domestic private sector
3- Management Contract with foreign private sector
4- Management Contract with a combined group of private banks
The responders have evaluated the methods with the following choices of:
1- Inappropriate 2- Suitable Method for 3 years 3-Suitable method for 5 years
The collected evaluations of the responders for each of the proposed methods are shown in the following bar charts.
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Continuation of Present Condition with Distributing the Justice Shares to the Individuals
%70.0
%58.3 %60.0
%50.0
%40.0
%30.0 %25.0
%20.0 %10.0 %10.0 %6.7
%0.0 ﺑﻲ ﭘﺎﺳﺦ ﻗﺎﺑﻞ اﺟﺮا ﺑﺮاي 5 ﻗﺎﺑﻞ اﺟﺮا ﺑﺮاي 3 ﻏﻴﺮ ﻗﺎﺑﻞ اﺟﺮا ﻳﺎ ﻧﺎ ﺳﺎل ﺳﺎل ﻣﻨﺎﺳﺐ
Management Contract with Domestic Private Sector
%60.0 %51.7 %50.0
%40.0
%30.0 %25.0
%20.0 %16.7
%10.0 %6.7
%0.0 ﺑﻲ ﭘﺎﺳﺦ ﻗﺎﺑﻞ اﺟﺮا ﺑﺮاي 5 ﺳﺎلﻗﺎﺑﻞ اﺟﺮا ﺑﺮاي 3 ﺳﺎل ﻏﻴﺮ ﻗﺎﺑﻞ اﺟﺮا ﻳﺎ ﻧﺎ ﻣﻨﺎﺳﺐ
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Management Contract with Foreign Private Sector
%70.0 %66.7
%60.0
%50.0
%40.0
%30.0
%20.0 %15.0 %11.7 %10.0 %6.7
%0.0 ﺑﻲ ﭘﺎﺳﺦ ﻗﺎﺑﻞ اﺟﺮا ﺑﺮاي 5 ﺳﺎل ﻗﺎﺑﻞ اﺟﺮا ﺑﺮاي 3 ﺳﺎل ﻏﻴﺮ ﻗﺎﺑﻞ اﺟﺮا ﻳﺎ ﻧﺎ ﻣﻨﺎﺳﺐ
Management Contract with a Combined Group of Private Banks
60.0% 56.7%
50.0%
40.0%
30.0%
20.0% 18.3% 15.0% 10.0% 10.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺳﺎل 5ﻗﺎﺑﻞ اﺟﺮا ﺑﺮاي ﺳﺎل 3ﻗﺎﺑﻞ اﺟﺮا ﺑﺮاي ﻏﻴﺮ ﻗﺎﺑﻞ اﺟﺮا ﻧﺎﻳﺎﻣﻨﺎﺳﺐ
According to the discrete data collected in this part we reduce the number of choices to two choices of suitability and unsuitability through combining the two choices of
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suitable method for 3 years (code 2) and suitable method for 5 years (code 3) to create the appropriate choice (code1) next to the inappropriate choice (code 0).
Proportion estimation of the responders who evaluate the methods as suitable or unsuitable method in question 21 of the questioner is shown in the following table:
Estimate proportion of No. Proposed Method Unsuitable Suitable
Continuation of present condition with distributing the Justice 1 65% 35% Shares to the individuals
2 Management Contract with domestic private sector 55% 45%
3 Management Contract with foreign private sector 71% 29%
Management Contract with a combined group of private 4 63% 37% banks
The resulted proportions indicate that generally, the majority of the responders consider none of the proposed methods as suitable solution without a change in the present ownership combination of the privatized SOBs. While, the proposed method of management contract with the foreign private sector has got the least confirmation.
In normal condition where two choices indicate the suitability then, their combined choice should be equal to 0.67 or 67%. Therefore, the proportion parameter of pre- assumed in the null hypothesis will be equal to 0.67 and the related hypothesis testing will be:
⎧⎧Hp00:= 0.67 Hp:−= 0.67 0 ⎨⎨ or ⎩⎩Hp11:0.67≠ Hp:0.670−≠
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The null hypothesis shows that if the responds to the suitability be in the normal condition then, its proportion should be around 67%. Alternatively, if this claim would not be correct then, the null hypothesis will be rejected in order to accept the alternative hypothesis. In other words, it would be an indication for the preference of agreements or disagreements towards the suitability of the method.
The result of t-student test will be as the following table.
One-Sample Test
Test Value = 0.67 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper q21_1 -4.850 53 .000 -.318 -.45 -.19
-3.335 55 .002 -.224 -.36 -.09
q21_3 -6.309 55 .000 -.384 -.51 -.26 1_4 -4.517 53 .000 -.300 -.43 -.17
Based on the above results, there is a sufficient evident to reject the null hypothesis for all the proposed methods and with 95% confident interval the proportion of the responders who evaluate the methods suitable, is different from 67%.
To identify its different with (p-0.67), the following table will show the result.
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Proportion estimation of the responders evaluate the methods
No. Proposed Method Suitable Unsuitable
Lower Upper Lower Upper Bound Bound Bound Bound
Continuation of present condition 1 with distributing the Justice Shares to 22% 48% 52% 78% the individuals
Management Contract with domestic 2 31% 58% 42% 69% private sector
Management Contract with foreign 3 16% 41% 59% 84% private sector
Management Contract with a 4 24% 50% 50% 50% combined group of private banks
Regarding the upper and lower bounds of the confident interval shows that the proportion of suitable responds is less than 67% with 95% confident interval. Also, the estimated proportion of inappropriate responds to each proposed methods is more than 33% with 95% confident interval.
In sum, the final result of the test indicates that the responders do not accept the suitability of any proposed method in the condition of no change in the present ownership combination.
To identify the proportion difference between the suitability and unsuitability of each proposed methods, the related hypothesis test will be as:
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Null hypothesis (H0): Suitability (or unsuitability) proportions for all the proposed methods are equal
Alternative hypothesis (H1): At least the suitability (or unsuitability) proportion of one proposed method is different from others.
The Kruskal- Wallis test will be applied as the following:
Ranks
Mean Group N Rank 1 54 109.20 2 56 119.61 Q21_Total 3 56 101.93 4 54 111.24 Total 220
Test Statistics (a,b)
Q21_Total Chi-Square 3.157 df 3 Asymp. Sig. .368
The results do not show any significant difference and the p-value of the Kruskal- Wallis test of 0.368 confirms this claim and indicate not sufficient evident to reject the null hypothesis, or any significant different within the proposed methods and the responders do not know any of the methods suitable without the change in the ownership combination.
The additional contributed expressions of the interviewees on each of the proposed methods are as:
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1- The matter of Justice Shares is a complex problem with encouraging advantages for the government not to solve it. Yet, this one way advantages do not seem be sustainable even for the government.
2- The same reasons that caused the private sector not get the chance of being strengthened during the whole procedure of the privatization, would remain effective in this case too and the government would not fallow to make a management contract with this sector.
3- The same reasons that caused the foreign investors not to get the chance or intention to participate in privatizing the SOBs would be effective in this case too and the government would not fallow to make a management contract with this sector.
4- Disregarding the tendency or capabilities of the private sector for bank management through the contract, the government would not allow the private banks neither domestic nor foreign type as an independent group to take the control of the Privatized SOBs.
3.6.2.13. Effective Changes in Ownership Structure to Improve the Performance of Privatized Banks
Previous part evaluation revealed that the responders would not agree with any improving solution that does not include the ownership structure. In other word they see the present situation as a dead end passage for transferring the management control to the private sector without change in the ownership structure. Therefore in this part it necessitates to propose the effective changes in ownership structure as a solution to improve the performance of privatized bank which is mainly consistent with the objective of successful continuation of private banking.
The distinctive difference between the Iranian privatized and private banks is in the appearance of their ownership combination and the resulted management.
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The ownership structure of private banks is combined of semi-government institutes, private entities and the individuals. However, despite voting right for the private shareholders yet, in close to all of the private banks the semi-government institutes together, are the major shareholders and any voting result depends on their inner coalition. It seems that one of the solutions could be the restriction of total ownership of semi-government institutes in any bank. It is important to state that the restriction of chair number in the board of director for the semi-government institutes (the same as what has been done for the private individuals, mentioned in 6.2.10) would not work because these institutes would have their enforcement through the their inner coalition despite of limited chair in the board and also could take any extra bank’s credit or advantage beyond the shareholder deservingness through their external pressure followed by their power. On the other hand, the privatized banks through their ownership structure are under the management control of the government and addition to the board members that have a sit for the representative of the minister of Economic Affairs and Finance, the managing director is also appointed by the government. Therefore, it seems that any change in the ownership structure of the private banks partly depends on the market demand more depends on the semi- government institute to relinquish their shares. While, in privatized banks it only depends on the tendency of the government to make any change in the ownership structure.
In sum, there are many studies indicating the performance improvement of privatized banks after privatization while they believe that in developing countries, state-owned banks have poorer performance than private and privatized banks in different aspects such as profitability, productivity, capital ratio, liquidity (Berger et al., 2003; Micco et al., 2007; Mian, 2006; Cornette et al., 2003 and Weintraub and Nakane, 2005). State owned banks increase the risk of bank crisis and instability (La Porta et al., 2002). On the other hand, there are many wide ranges of studies indicating that government ownership of banks inhibits financial development and economic growth and by pursuing political, rather than socially and economically optimal objectives, it can hamper economic efficiency (Barth et al., 2004; La Porta et al., 2002). These
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findings should be considered in the case the privatized SOBs of Iran that are mainly owned by the government and are still being managed like the SOBs. Accordingly, it seems that a change in the government ownership of the privatized banks of Iran may have potentially a positive impact on their performance improvement.
The effective proportion of the following four proposed changes will be examined in this part.
1- Ceding of 20% government’s share (approved by law for any privatized SOE) to the private sector
2- Distributing the Justice Shares to the individuals
3- Restriction the total ownership of semi-government institutes in each bank to 10%
4- Foreign investors participation up to the permissible level for management control
Note: According to the circular No. 7038 dated 1388/1/19 (8April 2010) of the Central Bank, the ownership upper limit for any semi-government institute in any private or privatized banks is 10% with no limit for the total ownership of the semi- government institutes.
The following Likert scale ranking was provided for the responders’ evaluation.
1-None 2- Little 3- Moderate 4- Very 5-Very Much
The following bar charts illustrate the descriptive statistics of the responds related to the evaluation of effective change in the shareholders structure for improving the performance of privatized banks.
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Ceding of 20% Government’s Share to the Private Sector
45.0% 40.0% 38.3%
35.0% 31.7% 30.0% 25.0%
20.0% 16.7% 15.0% 10.0% 8.3% 3.3% 5.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻤﻲ اﺻﻼ
Distributing the Justice Shares to the Individuals
25.0% 23.3% 21.7% 21.7% 20.0% 20.0%
15.0% 11.7%
10.0%
5.0% 1.7%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻤﻲ اﺻﻼ
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Restricting the Total Ownership of Semi-government Institutes to 10%
50.0% 46.7% 45.0% 40.0% 35.0% 30.0% 26.7% 25.0% 23.3% 20.0% 15.0% 10.0% 5.0% 3.3% 0.0% ﺧﻴﻠﻲ زﻳﺎد زﻳﺎد ﮐﻤﻲ ﻧﺴﺒﺘﺎ
Foreign Investors Participation up to the Permissible Level for Management Control
60.0%
48.3% 50.0% 41.7% 40.0%
30.0%
20.0%
8.3% 10.0% 1.7% 0.0% ﺧﻴﻠﻲ زﻳﺎدزﻳﺎد ﻧﺴﺒﺘﺎ ﮐﻤﻲ
The hypothesis for examining the equivalence effect of each factor in performance improvement of privatized banks will be as:
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Null hypothesis (H0): The impacts of all the factors in performance improvement of privatized banks are equal.
Alternative hypothesis (H1): At least, the impact of one factor in performance improvement of privatized banks is different from the others.
The results of non-parametric Kruskal- Wallis test are shown in the following tables.
Ranks
Mean Group N Rank 1 58 124.92 2 59 81.37 Q22 3 60 122.83 4 60 146.44 Total 237
Test Statistics (a,b)
Q22 Chi-Square 30.873 df 3 Asymp. Sig. .000
The mean rank for factor 2 (distributing the Justice Shares to the individuals) is notoriously less than the other factors. The p-value shows that with 99% confidence the null hypothesis is rejected and there is a significant difference between the impacts of four factors in performance improvement of privatized banks.
Also the following Levene test rejects the homogeneity of the variances:
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Test of Homogeneity of Variances
Q22
Levene df1 df2 Sig. Statistic 21.507 3 233 .000
Therefore, instead of Tukey HSD test, the Tamhane’s T2 test will be implemented for multiple comparisons of the impacts of each individual factor on the performance improvement of the privatized banks. The following table demonstrates the test results.
Q22
Subset for alpha = .05 Group N 1 2 2 59 2.95 1 58 3.3 Tukey 3 60 3.97 HSD(a,b) 4 60 4.30 Sig. 1.000 .217
The test result shows that with 95% confident, the impact of distributing the Justice Shares to the individuals is significantly less than the other three factors.
Meanwhile, the other three factors with high mean score will have a considerable impact on the performance improvement of the privatized banks with the highest portion for “foreign investor ownership up to, 2005 the permissible level of management control.
The main underline issues raised by the interviewees are summarized as:
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Consistent with the findings of Megginson (2005) and Clarke et al. (2007), the interviewees believed that not relinquishing the government ownership would not provide any basic and long run performance improvement in privatized banks. Certainly, such a belief has the same application for the ownership of the semi-government institutes. Consistent with the successful experiences of foreign investor participation in the bank privatization indicated by Bonin et al. (2005); Abel and Siklos (2002) and Megginson (2005), the interviewees strongly believed in the wide and deep positive impact of foreign investors in the performance improvement of the privatized banks in case of allowing them to participate to the permissible ownership limit of management control. It seems that to the interviewees, the foreign investment does not suffice the banking system to improve and this investment should come along with the management control of the foreign investors.
The reasons of low rank of factor2 (distributing the Justice Shares to the individuals) from the viewpoint of the interviewees can be classified as:
Those who have evaluate the effect portion of factor 2 either as “none” or “little” are mostly the responders who see the issue of the Justice share so fraud that can imagine no short or medium term solution for it.
Those who have evaluated the effect portion of factor 2 as “moderate” are mostly the responders who hope that the distribution of Justice Shares to the individuals with high intention of individual owner (evaluated in 6.4) to re- offer the shares will cause a gradual change in the ownership structure with the hesitancy that the change would might be to the benefit of the semi- government institutes instead of private sector.
A considerable amount of responders (45%) do not give any credit to distributing the Justice Shares to the individual because of disqualification of the identified individuals from different aspects such as their geographical 384
scattering, least related knowledge, not correct and enough understanding of the shareholding concepts of each firm or bank in their Justice Shares basket that all in all will collapse the privatized SOE or SOB addition to the stock market.
3.6.2.14. Methods Evaluation for Reducing the Ownership Portion of Semi- government Institutes in Privatized SOBs.
The ownership of semi-government institutes in privatized SOBs is one of the main factors that give the government a chance of claiming the privatization of SOBs with their management control. Consequently, the reduction of this kind of ownership could be a solution to coincident mitigating the government’s dominance and promoting the private sector intervene in private banking. The proposed methods in achieving the objective of reducing the ownership of semi-government institutes in privatized SOBs are:
1- Re-offering their shares in TSE at once.
2- Gradual re-offering their shares in TSE.
3- Re-selling their shares to the private sector through negotiation
4- Re-selling their shares through coincident negotiation with domestic and foreign private sectors.
The suitability or unsuitability of each proposed method has been ranked as:
1-Unsuitable 2- Suitable 3- Best Solution
The responders’ evaluations of each proposed method for ownership reduction of semi-government institutes in privatized SOBs are shown in the following bar charts.
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Share Re-offering at once in TSE
70.0% 58.3% 60.0%
50.0%
40.0%
30.0% 23.3% 20.0% 10.0% 8.3% 10.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺑﺴﻴﺎر ﻣﻨﺎﺳﺐﻣﻨﺎﺳﺐ ﻏﻴﺮ ﻗﺎﺑﻞاﺟﺮا
Gradual Share Re-offering in TSE
60.0% 53.3% 50.0%
40.0% 31.7% 30.0%
20.0%
8.3% 10.0% 6.7%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺑﺴﻴﺎر ﻣﻨﺎﺳﺐﻣﻨﺎﺳﺐ ﻏﻴﺮ ﻗﺎﺑﻞاﺟﺮا
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Share Ceding to Private Sector by Negotiation
40.0% 36.7% 35.0% 33.3%
30.0%
25.0% 21.7% 20.0%
15.0%
10.0% 8.3%
5.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺑﺴﻴﺎر ﻣﻨﺎﺳﺐﻣﻨﺎﺳﺐ ﻏﻴﺮ ﻗﺎﺑﻞاﺟﺮا
Share Ceding to Domestic and Foreign Sectors by Coincident Negotiation
40.0% 36.7% 35.0% 33.3%
30.0%
25.0% 21.7% 20.0%
15.0%
10.0% 8.3%
5.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺑﺴﻴﺎر ﻣﻨﺎﺳﺐﻣﻨﺎﺳﺐ ﻏﻴﺮ ﻗﺎﺑﻞاﺟﺮا
It is noticeable in the bar charts that 8.3% of the responders neither have evaluated any of the proposals nor gave any other comment in the questioner.
For statistic analysis it requires to combine the two choices of suitable (code2) and best solution (3) to be considered as a choice of “suitable” next to the unsuitable 387
choice (0). Consequently, any proportion for suitable responds will be estimated and the result will be compared by the statistical tests.
The suitability proportion for each proposed method will be estimated in the following table.
Proportion estimation of No. Proposed Method Suitability Unsuitability
1 Share Re-offering at once in TSE 36% 64%
2 Gradual Share Re-offering in TSE 93% 7%
3 Share Ceding to private Sector by Negotiation 76% 24%
Share Ceding to Domestic and Foreign Sectors by Coincident 4 77% 77% Negotiation
The above results demonstrate that “share re-offering at once” has been valuated as the most unsuitable proposed method and “gradual share re-offering” as the most suitable method.
Assuming P as the suitability proportion of each method, then in normal condition 67% of the responds should indicate suitability and 33% indicate unsuitability. Then, the related hypothesis test will be:
⎧⎧Hp00:= 0.67 Hp:−= 0.67 0 ⎨⎨ or Hp:0.67≠ Hp:0.670−≠ ⎩⎩11
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And the result of the test will be shown in the following table.
One-Sample Test
Test Value = 0.67 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper Q23_1 -4.680 54 .000 -.306 -.44 -.18 Q23_2 7.280 54 .000 .257 .19 .33 Q23_3 1.620 54 .111 .094 -.02 .21 Q23_4 1.719 55 .091 .098 -.02 .21
According to the test p-value, the null hypothesis for the two first proposed methods of re-offering the shares of semi-government institutes in privatized SOBs either gradually or at once is rejected and with 95% confidence interval the suitability proportion of these two methods is significantly different from its normal condition of 67%. Meanwhile, in 95% confidence level, there is not sufficient evident to reject the null hypothesis for the third and fourth proposed methods ceding the shares through negotiation either by private sector or coincident negotiation with domestic and foreign private sector..
Regarding the 95% confidence interval for suitability responds, provides more information about suitability of the methods in below table.
389
Proportion Estimate Proportion Estimate in Suitability in Unsuitability No. Proposed Method Lower Upper Lower Upper Bound Bound Bound Bound
1 Share re-offering at once in TSE 23% 49% 51% 77%
2 Gradual share re-offering in TSE 86% 100% 0% 14%
Share ceding to private sector by 3 65% 88% 12% 35% negotiation
Share ceding to domestic and foreign 4 sectors through coincident 65% 88% 12% 35% negotiation
Estimate of 95% confidence interval and regarding the upper bound of suitability for the first method is 49% that means the responders do not consider this proposition as a suitable method. Yet, they find the “gradual share re-offering of the semi- government institutes as the most suitable method to reduce their ownership proportion in privatized SOBs.
Regarding the upper and lower bounds of 95% confidence interval for two kinds of share ceding by negotiation indicate that there cannot be any definite expression for their stability or vice versa.
For comparing the proposed methods the related hypothesis test will be:
Null hypothesis (H0): The suitability (or unsuitability) proportions of all proposed methods are equal.
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Alternative hypothesis (H1): At least the suitability (or unsuitability) proportion of one of the proposed methods is different from the others.
The non-parametric Kruskal-Wallis test shows the following results.
Ranks
Mean Group N Rank 1 55 73.18 2 55 135.46 Q23_Total 3 55 117.38 4 56 117.85 Total 221
Test Statistics (a,b)
Q23_Total Chi-Square 45.727 df 3 Asymp. Sig. .000
It results that the null hypothesis is rejected with 99% confidence and the methods’ proportions are significantly different from each other. In other words, the responders prefer at least one of the methods to the others.
Test of Homogeneity of Variances
Q23_Total
Levene df1 df2 Sig. Statistic 24.600 3 217 .000
391
The results of the Levene statistics show that the homogeneity of variances for the proposed methods is rejected and the following Tamhane’s T2 test is implemented for the multiple comparisons.
Q23_Total
Subset for alpha = .05 Group N 1 2 3 Tamhane 1 55 .36 (a,b) 3 55 .76 4 56 .77 2 55 .93 Sig. 1.000 .957 1.000
Once more, the results show that “share re-offering at once” is the most unsuitable method with significant difference and the gradual share re-offering is the most suitable method to reduce the Semi-government ownership in privatized SOBs with significant preference to the others.
The main believes of the interviewees on the whole idea of ownership reduction of semi-government institutes can be summarized as:
It is unlikely that the semi-government institutes re-offer their shares in SOBs like any other SOEs as it will cause both reduction in government’s control and increase of private sector involvement.
The capital market would not show both the financial potential and investment confidence in case the semi-government institutes re-offer their shares at once. Therefore, such a policy could only be to the benefit of the government in claiming that there is not a demanded market for these shares.
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The government including the semi-government institutes would not be interested in negotiation with private sector neither domestic of foreign type. Therefore the two factors of re-selling the shares either through negotiation would not work.
The only possible way for semi-government institutes to attract the trust of the capital market and utilize its potential could be the gradual share re-offering.
3.6.2.15. Evaluating the Reduction Methods of Justice Shares in Privatized SOBs
The idea of the Justice Shares distribution in privatized SOBs could be discussed and be evaluated from different views. But here, according to its pre mentioned negative impacts in privatized SOBs, some of the probable practical methods to reduce the proportion of allocated Justice Shares will be evaluated in case of reducing its negative impacts in the continuation of the privatized banks specifically through reducing the government’s management control in the privatized SOBs.
There are also three important points to be mentioned before analyzing the responds.
1- The present allocated Justice Shares as has been described in ownership combination of privatized SOBs (chapter 5) is an indication of another doubtless reason of government’s control. This type of government’s control will be continued as long as the shares remain as allocated shares managed by governmental provincial investment companies.
2- The portion of Justice Shares in the ownership structure of the privatized banks show that it is not yet reached the upper limit of 40%-50% in each privatized banks. It means that the government can raise the existed amount of Justice Shares and intensify its impact on different management and operation aspects of privatized banks.
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3- The reason that this question includes an emphasis on the consideration of the benefit of so called owners of the Justice Shares is that this idea worked for the government as a “Patronage Machine”. Therefore, any change or any related application should sufficiently cover the security margin towards any social reaction.
All in all, it results that the reduction amount of Justice Shares in the privatized banks could be an improving step towards the privatized banks’ success continuation. Although, the benefit of its primary identified owners (table 3) should be regarded. Therefore, with all these consideration the proposed methods are as follow:
1- Encouraging the private sector to establish public shares Investment Company and ceding all the Justice Shares to the company/s at once.
2- Establishing the private financial specialized investment companies/ banks and ceding the Justice Shares of privatized SOBs to the companies/banks.
3- Ceding the Justice Shares portion of privatized SOBs to the private sector by negotiation and bidding in TSE.
4- Providing fund by private banks and transferring at once all the portion of Justice Shares in privatized SOBs to this fund.
The choices to respond are as:
1-Unsuitable 2- Suitable 3-Best solution
The responded evaluations are shown in the following bar charts.
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Ceding of Total Justice Shares to the Private Investment Companies
60.0% 55.0%
50.0%
40.0% 31.7% 30.0%
20.0%
10.0% 8.3% 5.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺑﻬﺘﺮﻳﻦ روشﻣﻨﺎﺳﺐ ﻧﺎﻣﻨﺎﺳﺐ
Ceding the Justice Shares of Privatized SOBs to the Private Financial Specialized Investment Companies/Banks
60.0% 53.3% 50.0%
40.0% 31.7% 30.0%
20.0%
8.3% 10.0% 6.7%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﺑﻬﺘﺮﻳﻦ روشﻣﻨﺎﺳﺐ ﻧﺎﻣﻨﺎﺳﺐ
395
Ceding Justice Shares of privatized SOBs to the Private Sectors by Negotiation and Bidding in TSE
50.0% 45.0% 45.0% 40.0% 35.0% 30.0% 25.0% 23.3% 23.3% 20.0% 15.0% 10.0% 8.3% 5.0% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﺑﻬﺘﺮﻳﻦ روش ﻣﻨﺎﺳﺐ ﻧﺎﻣﻨﺎﺳﺐ
Ceding the Justice Shares of Privatized SOBs to Private Banks’ Fund
50.0% 43.3% 45.0% 41.7% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 11.7% 10.0% 5.0% 3.3% 0.0% ﺑﻬﺘﺮﻳﻦ روش ﺑﻲ ﭘﺎﺳﺦﻣﻨﺎﺳﺐ ﻧﺎﻣﻨﺎﺳﺐ
The same as the previous analysis method, the three choices will be combined and be replaced by two choices of suitability and unsuitability. The suitability (or unsuitability) proportion of each proposed method is shown in the following table:
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Portion Estimation No. Proposed Method Suitability Unsuitability
Share ceding to established private investment 1 65% 35% companies (all the Justice Shares at once)
Share ceding to private financial specialized 2 investment company/bank (Justice Shares portion 66% 34% in privatized SOBs)
Share ceding to private sector by negotiation and 3 75% 25% bidding in TSE
4 Share ceding to established fund by private sector 51% 49%
Regarding to suitability portions of each proposed method, the ceding of Justice Shares in the shareholder combination of privatized SOBs to the private sector by negotiation, has got the most suitability proportion and the share ceding to the fund established by private banks has got the least suitability proportion. However, the related hypothesis test with respect to the combination of the choices will be:
⎧⎧Hp00:= 0.67 Hp:−= 0.67 0 ⎨⎨ or ⎩⎩Hp11:0.67≠ Hp:0.670−≠
And the test result is demonstrated in below table.
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One-Sample Test
Test Value = 0.67 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper q25_1 -.239 54 .812 -.015 -.15 .11 q25_2 -.145 55 .885 -.009 -.14 .12 q25_3 1.273 54 .209 .075 -.04 .19 q25_4 -2.316 52 .025 -.161 -.30 -.02
The results reject the null hypothesis only for the fourth method with its significant difference with the test value of 0.67 and there is not sufficient evident to reject null hypothesis for the other proposed methods and the estimation of 95% confidence interval for the responds’ proportions shown in below table.
Responding Estimation of
Suitability Unsuitability No. Proposed Method
Lower Upper Lower Upper Bound Bound Bound Bound
Share ceding at once to the established 1 52% 78% 51% 77% private investment companies
Share ceding to the private financial 2 specialized company/Bank (privatized 53% 79% 0% 14% SOBs’ portion)
Share ceding to private sector by 3 63% 86% 12% 35% negotiation and bidding in TSE
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Share ceding to established fund by 4 37% 65% 12% 35% private banks
As a result, establishment of a fund by the private banks and ceding the Justice Shares portion of privatized SOBs to this fund is significantly less than 67% and it is not a suitable (inappropriate) method from the viewpoint of the responders.
Regarding the 95% confidence for the other three methods and the upper and lower limits of 67% indicate that the responders’ evaluations towards the three methods are intermediate with no definite expression either for their suitability or unsuitability.
The related hypothesis test for identifying the significant difference proportion of suitability for each proposed method will be examined by non-parametric Kruskal- Wallis test as fallow:
Null hypothesis (H0): The proportions of suitability (or unsuitability) of all the proposed methods are equal.
Alternative hypothesis (H1): At least suitability (or unsuitability) proportion of one proposed method is different from the others.
Ranks
Mean Group N Rank 1 55 111.17 2 56 111.85 Q25_Total 3 55 121.13 4 53 95.28 Total 219
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Test Statistics (a,b)
Q25_Total Chi-Square 6.718 df 3 Asymp. Sig. .081
In respect of mean ranks of the methods and the p-value test, there is not sufficient evident for significant difference mentioned in null hypothesis and it cannot be confidently rejected. In other words, to the responders, none of the proposed methods to reduce the proportion of Justice Shares in the ownership combination of privatized SOBs has a specific preference to the others.
Therefore, there is also no reason to compare the suitability proportion for each method to identify the most suitable one.
The result of evaluating the methods for reducing the ownership portion of the semi- government institutes in previous analysis demonstrated the disappointing views of the responders towards the probability of such an event by any method. However, the same result is also appeared for the case of reducing the portion of Justice Shares in the privatized SOBs. Apart from the proposed methods, the responders have not given any other idea of their own as it was requested in the questioner. This brings up the presumption that to the responders, at the existed situation, no method would work to reduce neither the ownership portion of the semi-government nor the Justice Shares portion in the privatized SOBs. The reason of such a pessimistic evaluation or disappointing view of the responders is capsulated in the essence of the interviewees contribution by stating that “the idea of the Justice Shares is that much mistake that there is no way to put make up on it and the ownership of semi-government institutes in privatized SOBs is that much vital for the government that there is no way to relinquish it in any cost”.
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3.6.2.16. Evaluation the Ceding Methods of Remaining Shares of Privatized SOBs
By remaining shares of the privatized banks means the total shares that have not been ceded yet (at the time of this research) including:
20% government’s shares Any amounts of not ceded shares including the remaining Justice Shares’ allocation up to the limit of 40%-50% of the total shares of privatized SOBs. Any shares amount that may be more bartered to the semi-government institutes
The following methods were proposed for the responders’ evaluation.
1- Continuation of the executed method
2- New SIP through banks’ capital increase and divesting the participation right of the present owners.
3- Selling to qualified private sector through negotiation and bidding in TSE
4- Providing necessary conditions to attract foreign investors
5- Excluding SOBs from Justice Shares Distribution
The respond’s choices for evaluation are:
1-Unsuitable 2- Suitable 3- One of the best
The responders’ evaluations on each proposed ceding method of the remaining shares of privatized SOBs in case of providing better condition of continuation success are shown in the following bar charts.
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Continuation of the Executed Method
80.0% 71.7% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 16.7% 10.0% 6.7% 5.0% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﻳﻜﻲ از ﺑﻬﺘﺮﻳﻦ روش ﺗﻨﻬﺎ روش ﻣﻤﻜﻨﻪ آﺎﻣﻼ ﻧﺎﻣﻨﺎﺳﺐ هﺎ
New SIP through Capital Raise and Divesting the Participation Right of the Present Owners
60.0% 50.0% 50.0%
40.0%
30.0% 26.7%
20.0% 15.0% 8.3% 10.0%
0.0% ﺑﻲ ﭘﺎﺳﺦ ﻳﻜﻲ از ﺑﻬﺘﺮﻳﻦ روشهﺎ ﺗﻨﻬﺎ روشﻣﻤﻜﻨﻪ آﺎﻣﻼﻧﺎﻣﻨﺎﺳﺐ
402
Ceding to the Qualified Private Sectors by Negotiation and Bidding in TSE
70.0% 61.7% 60.0%
50.0%
40.0%
30.0% 21.7% 20.0% 15.0%
10.0% 1.7% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﻳﻜﻲ از ﺑﻬﺘﺮﻳﻦ روش ﺗﻨﻬﺎ روش ﻣﻤﻜﻨﻪ آﺎﻣﻼ ﻧﺎﻣﻨﺎﺳﺐ هﺎ
Providing Necessary Conditions to Attract Foreign Investors
70.0% 65.0%
60.0%
50.0%
40.0%
30.0% 26.7%
20.0%
10.0% 5.0% 3.3% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﻳﻜﻲ از ﺑﻬﺘﺮﻳﻦ روش ﺗﻨﻬﺎ روش ﻣﻤﻜﻨﻪ آﺎﻣﻼ ﻧﺎﻣﻨﺎﺳﺐ هﺎ
403
Excluding the Privatized SOBs from Justice Shares Distribution
50.0% 45.0% 43.3% 40.0% 35.0% 30.0% 28.3% 25.0% 21.7% 20.0% 15.0% 10.0% 6.7% 5.0% 0.0% ﺑﻲ ﭘﺎﺳﺦ ﻳﻜﻲ از ﺑﻬﺘﺮﻳﻦ روش ﺗﻨﻬﺎ روشﻣﻤﻜﻨﻪ آﺎﻣﻼﻧﺎﻣﻨﺎﺳﺐ هﺎ
With (Code 0) for choice of unsuitable and (Code 1) for the combined two other choices, the proportion of suitability or unsuitability of the two resulted choices will be as table below.
Proportion Estimation of No. Proposed Method Suitability Unsuitability
1 Continuation of executing method 14% 86%
Ceding through capital raise and divesting the 2 80% 2% participation right of present owners
3 Ceding to qualified private sector 81% 19%
Providing necessary conditions to attracting 4 93% 7% the foreign investors
Excluding SOBs from Justice Shares 5 70% 30% distribution
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The estimated proportions indicate that the least suitable evaluated method with 14% proportion is continuation of executed method and the most suitable evaluated method (as predicted) with 93% proportion is to provide the necessary conditions for attracting the foreign investors.
With the “p-value” test for the suitability, the related hypothesis test and the result of the test will be:
⎧⎧Hp00:= 0.67 Hp:−= 0.67 0 ⎨⎨ or ⎩⎩Hp11:0.67≠ Hp:0.670−≠
One-Sample Test
Test Value = 0.67 95% Confidence Sig. Mean Interval of the t df (2-tailed) Difference Difference Lower Upper TQ27_1 -10.692 49 .000 -.53 -.63 -.43 TQ27_2 2.039 43 .048 .13 .00 .25 TQ27_3 2.388 46 .021 .14 .02 .26 TQ27_4 611 43 .000 .26 .18 .34 TQ27_5 .391 42 .698 .03 -.12 .17
The p-value of t-student test demonstrates that except the last proposed method of “excluding the privatized SOBs from the Justice Shares distribution”, there is sufficient evident to reject the null hypothesis for the rest of the proposed methods and with 95% confidence, it can be resulted that suitability of these methods are significantly different from the 67% value. The 95% confidence intervals are shown in table below:
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Proportion Estimation of:
Suitability Unsuitability No. Index
Lower Upper Lower Upper Bound Bound Bound Bound
1 Continuation of executing method 4% 24% 76% 96%
Ceding through capital raise and 2 divesting the participation right of 67% 92% 8% 33% present owners
3 Ceding to qualified private sector 69% 93% 7% 31%
4 Attracting the foreign investors 85% 100% 0% 15%
Excluding SOBs from Justice 5 55% 84% 16% 45% Shares distribution
Regarding the above result the responder evaluate the two first proposed methods of continuation the executed method and capital raise along with divesting the participation right of the present owners as completely unsuitable and the next three as suitable methods and the last one which is directly deals with the matter of Justice Shares with no explicit judgment. The related hypothesis to identify the significant suitability difference within the proposed methods is:
Null hypothesis (H0): Suitability (or unsuitability) proportions for all the proposal methods are equal.
Alternative hypothesis (H1): Suitability (or unsuitability) proportion of at least one of the proposed method will be different than the others.
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The result for Kruskal-Wallis test for the above hypothesis shown in the table bellowed.
Ranks
Mean Group N Rank Q27_Total 1 50 54.96 2 44 129.68 3 47 131.17 4 44 145.23 5 43 118.53 Total 228
Test Statistics (a,b)
Q27_Total Chi-Square 83.128 df 4 Asymp. Sig. .000
Regarding the mean ranks of the proposed methods and the test p-value, the null hypothesis is rejected with 99% confidence and the suitability proportions are significantly different from each other. It means that at least one of the methods has been evaluated differently.
To identify the most suitable and the most unsuitable evaluated within the proposed method the following tests are implemented.
Levenee df1 df2 Sig. Statistic 9.845 4 223 .000
The results reject the homogeneity of the variances: 407
Q27_Total
Subset for alpha = .05 Group N 1 2 3 1 50 .14 5 43 .70 Tamhane 2 44 .80 .80 (a,b) 3 47 .81 .81 4 44 .93 Sig. 1.000 .636 .431
The results of Tamhane’s T2 test above, demonstrate that continuation of the executed method with significant different is the most unsuitable or inappropriate method and the remaining methods in order of more to less suitable are as:
Providing the condition for attracting the foreign investors
Share ceding to qualified private sector through negotiation and bidding in TSE
Capital raise and divesting the participation of present owners
Once more the responders including the interviewees show that they avoid of considering any feedback for or from the case of Justice Shares and additionally they again chose the case of foreign investor participation as the best solution related to the issues of privatized SOBs.
3.6.3. Results
In sum, the results of statistical and descriptive analysis of the collected data through 60 questioners and the collected contributions of 48 interviewees indicate that:
At the pre-privatization stage of SOBs and according to the propounded basic requirements of this stage the necessary study of the market condition and investors potentially were not 408
compatible with the average amount of current expectation and both organizational and financial re-structuring of SOBs before privatization had not met the minimum regular expectation level.
At the execution stage of SOBs privatization, the results demonstrate that the government intentionally ceded the SOBs shares in a way not to reduce its incumbency and not to provide a necessary chance for private sector’s participation. Meanwhile, disregarding of TSE’s regulation during the procedure of privatization was verified.
As the results of two mentioned stages, despite of privatized appearance of SOBs, none of the major ownership and management control of the four privatized SOBs has been shifted from government to the private sector.
Consequently the appointed managements of all four privatized SOBs are not capable of independent policy and decision makings with avoiding the orderly interventions of the government.
As long as the Justice Shares portion in all the privatized SOEs (including SOBs) have been still remained under the control of governmental provincial investment companies, therefore, in case of distributing these allocated Justice Shares of the privatized SOBs to the individuals, the immediate share re-selling by the new individual owners is predictable.
The reaction of three main active groups of the market to the predicted Justice Shares re- offering is analyzed as follow:
The Semi-government institutes could be the major collector group of these probable re- offered shares to retain the governmental control of the privatized banks.
The unofficial credit cooperatives could be at the next level mainly to show off the increase of their participation in official activities in the capital market.
The private sector would have the least chance and interest of participation in this market.
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The different probabilities that may improve the condition for success continuation of private banking in Iran require analyzing the present condition to outline the crucial issues in the process. Therefore, one of the major considered areas at this part was the matter of ownership combination from different angles in the questioner and be discussed with the interviewees. The results show that any decrease in the ownership of semi-government institutes reciprocally could provide more chance and tendency for private sector to be active in this segment of the market. This is also consistent with the promise of the government during its Justification of share ceding to these institutes at the primary stage of SOBs privatization. However the result verified that the probability of share re-offering by semi-government institutes would be law if the country’s general condition be the same as it is even though, there is no certain prediction in what way this condition may changes or continues .
However, under the ceteris paribus assumption there are some predictions for the short future of the privatized SOBs as follow:
E-banking will be expanded partly because of general inevitable proceedings in banking system and partly because of a show off opportunity for the managements of privatized SOBs, no matter for what cost. The increase in profitability will be demonstrated anyway, mainly as an indication of an improved performance of privatized SOBs regardless of its verity or untruth. Providing the new products would happen mainly to escape of the legal barriers. No indication is found out for reduction of government’s intervention.
In case of successful continuation of private banking the present condition of private banks in Iran and its conformity with the current possibilities and International banking standards show that at the date of this study the private banking system:
Does enjoy neither required stability in government’s economic decisions and policies nor an independent observation by the Central Bank. There is a moderate competitive environment accompanied with moderate ranking of improved related Laws regulation. A high credit and provision is for the expansion of e-banking. 410
There is no indication for presence of international auditors, consultants or ranking institutions in the private banking system. There is not an opportunity for the private banks to expand their operations and investment out of the country.
For improving the existed condition of private banks the results show the importance of independency of Central bank. Although the most important and effective recognized factors that are repeatedly and strongly being evaluated by both the responders to the questioner and the interviewees are activation of foreign banks and attending the foreign investors in banking arena of the country. The reasons provided for this emphasize have been demonstrated in the cases related to the change in ownership structure of the banks, the required conditions for success continuation of private banking, transferring the management of privatized SOBs to the private sector and finally to establish a linkage with the international banking and financial market.
The ownership combination has been defined as one of the major different between existed situation of the private and privatized banks. Therefore, it necessitates finding out any effectiveness in the change of ownership structure of privatized SOBs. The results show that relinquishing the government’s ownership and restricting the total ownership of semi- government institutes are the highest concern of the interviewees and the questioner’s responders and they have recognized the two aforesaid ownership change much more positively effective than distributing the allocated Justice Shares to the individuals. However, such a positive recognized effects are still very behind of the effect that could be emanated of foreign investor participation in the ownership structure of the privatized SOBs.
Generally, the foreign investors’ participation had been resulted as one of major and the most effective improving factor in private banking of Iran. Therefore, it necessitates associating with the study of the different barriers that have caused the existed absence of such a positively evaluated factor in the banking arena of the country.
The study strictly indicates that the political condition of the country that caused imposing different sanctions and secluded the country in many foreign affair aspects is the main barrier 411
in attracting the foreign participants. Additionally, among the six related question in this part, the question of preventive effect of “Vali-e faghih’s authority in property right” faced a high proportion of “No Answer”. The interviewees as the 80% of the responders to the questioner stated that they are not interested in answering to this question. And this was the only case that the interviewees reluctantly did not respond. Therefore, such avoidance can be generalized to the remaining 20% of the responders too.
Clearly, the results indicated that the management of the privatized SOBs has not been transferred to the private sector and is under the full management control of the government. Then it was analyzed that what could be the main factors to make possible the change of the ownership combination in case of transferring the management to the private sector. Then, there had been also analyzed the methods for the same purpose of achieving the improvement condition through the management transfer to the private sector but without any change in the ownership combination.
The results altogether showed that:
There is no hope of any improvement without change in the resulted owner combination of the privatized SOBs. Re--offering the shares of the semi-government as the factor for declining their ownership proportion was appreciated least because of very low probability of its occurrence. In evaluating the different re-offering methods the gradual re-offering was the preferred method as a provider of relatively a better chance of participation for the private sector. But more than all, the coincident negotiation with domestic and foreign investors in re-offering the shares of semi-government institutes was the best recognized method.
Addition to the proposed methods of reducing the ownership portion of Semi-government institutes, some methods were also proposed to reduce the portion of Justice Shares too and once more it was resulted that there is no considerable justification for the responders to implement any improving method through the Justice Shares in any aspects. 412
Finally, according to the fact that any change in the ownership combination is possible only and only in case of government’s intention then, the possibility in ceding the remain shares have been proposed as the solution methods including; the 20% shares of the government, the bartered shares to the semi-government institutes that can easily be returned back addition to the remained portion of Justice Shares that have not been allocated yet.
The results showed that the continuation of the executed method has got the weakest ranking score and once more the first preference was participation of foreign investors with providing the required condition to attract them.
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Conclusion
Summary
The original aims of the thesis were:
To evaluate the implementation of basic steps related to the privatized banks at per- privatization stage. To identify the vital details of privatization plan in ceding the shares of the state- owned banks during the execution stage and clarify the resulted ownership structure addition to the condition of management control after privatization. To analyze the ownership structure of the privatized banks and evaluate the proposed method to reach an appropriate practical solution for privatizing the management of privatized banks. To implement a comparative study and evaluation the effectiveness of different factors, to identify the most effective once in successful continuation of private banking. To provide a reliable set of required condition to optimize the factors being recognized as most effective in continuation of private banking in Iran.
As a conclusion, this part describes how the work presented in this thesis has fulfilled the aforesaid aims, indicates the limitations through the process of study and finally outlines the future opportunities for research.
Principals and Originalities
This thesis has tackled the issue of bank privatization and private banking in Iran with attempt to analytically evaluate the procedure and results of banks privatization addition to identify the success condition for continuation of private banking within the framework emanated from the existing situation of banking industry in Iran.
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The whole effort in the thesis is based on the wide literature review of privatization in general and deepening in the theoretical debates and evidences of bank privatization in particular. As a completion, the effort has proceeded with an extensive and detailed picturing of bank privatization in Iran and its observable and concealed facts along with considering the basic pillars, barriers and deficiencies. It has been tried to equip the structure of the thesis with an appropriate methodological approach that has been established to evaluate the appropriateness of applicable proposals which might lead the private banking in Iran towards the successful condition.
The main claim to originality in the thesis lies firstly in its initiative entrance into the argument of bank privatization in Iran. Secondly, there has been put attempted to propose the different methods as the solution to the recognized problems and evaluate their suitability according to the existed condition of the country. Finally, its originality is due to an exceptional participation of multitude elites of the country both in executive and academic area for analyzing the existed conditions and evaluating the proposed solution methods.
Implementation of basic steps related to the privatized banks at per-privatization stage
Studying the success in bank privatization started from pre-privatization stage of privatization. It was mainly discussed how far the market condition and private investors’ situation was considered and in what amount the organizational and financial re-structuring were implemented in four banks agreed to be privatized and to what extent the buyer’s qualification did matter to the government.
Generally, because of meeting the scheduled timing, the speed of bank privatizing was so crucial for the government and on the other hand, the government’s determination to exploit the semi-government institutes as the main buyers for the offered shares of the banks, all together made it unnecessary for the government to consider neither the market condition nor the buyers’ qualification. The financial re-structuring was done only as the partial liquidation of government’s debt to the banks. Additionally, there was no indication of organizational re- structuring while, the over staff and excessive number of branches in the privatized banks
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were always known as their characteristics and had been repeatedly announced by the state officials too.
Vital details of privatization plan in ceding the shares of the state-owned banks during the execution stage and clarifying the results
On the basis of a thorough review of the literature, the political and economic constraints dictate the timing and design of bank privatization. Accordingly, in the case of Iran this basic necessitates identifying the vision of the regime and the mission of the privatizer governments in approaching the targets behind and in front of the privatization of SOBs.
The privatization objectives stated in Article 44 of the Constitutional Law of Islamic Republic of Iran draw the vision of the regime including the aim of preventing the enlargement of the government size and reduction of its incumbency in economic activities along with strengthening the private sector parallel to increase its involvement in economical activities. On the other hand, the implemented sale method as an indicator of the intention and the mission of the governments showed that an applied privatization plan was a combination of; voucher privatization under the pretended innovative idea of Justice Shares Distribution (up to the limit of 40%-50% of total shares of each SOE), a touch of buy-out sales method under the title of Preferred Shares (Up to 5% of total shares), implementing SIP to explore the share price for ceding the Justice Shares and transferring different amounts of privatized SOEs to semi-government institutes in case of bartering the government’s debt to them, retaining 20% legally approved amount of government’s ownership as an avoidance of full privatization and share offering to diffused buyers through the stock exchange to make the privatization meaningful. It was resulted that all the ceding process including the share pricing was mainly the result of lobbying with the semi-government institutes rather than the result of demanding competition meanwhile, the violence of the regulations in TSE has been taken as one of the symptoms of opaque procedure of SOBs privatization. Additionally, the government obtained the sale revenue only through the selling portion (excluded the bartering portion) to the semi- government institutes and diffused buyers. Alternatively, the designed flow process of ceding the Justice Shares has provided the government to allocate these shares to the governmental provincial investment companies instead of distributing them among the identified individuals 416
of the lowest deciles. The idea of Justice Shares without the necessary prerequisites and necessary future requirement not only has brought about a social-political mess but it also has not yielded any cash inflows, either to the privatized banks or to the government. Consequently, all these amalgamation left the control of the privatized bank under the direct dominance of the government through its appointed management in all four privatized banks and the government’s mission accomplished with the following achievements:
Let the government claim the performance of bank privatization duty conformed to the stated schedule in the Fourth Economic, Social and Cultural Development Plan ended in 2010 (latterly extended to 2011). Retained the government’s full management control in privatized bank despite of their privatization (mainly obliged to the aforesaid amalgamation and opaque procedure and reporting). Negating the participation chance of the private sector as a major shareholder in privatized banks and reciprocally, postponing (if not preventing) the involvement extension of private sector in private banking. Exploiting the idea of Justice Shares Distribution as a patronage machine among the mass of lowest deciles people.
Therefore, it is concluded that neither the whole procedure at execution stage, nor the achieved results are conformed to the declared vision of the regime stated in Article 44 of the Constitutional Law while, the accomplished mission of the government in privatizing the four SOBs also has neither a conformity with the bank privatization success nor is proportionate to the conditions be provided for success in continuation of private banking.
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Analysis the ownership structure of the privatized banks and evaluate the proposed method to reach an appropriate practical solution for privatizing their management.
Fig. 9: Different Impacts of Ownership Elements of Privatized Banks
Fig. 9 illustrates the main elements of ownership structure in privatized banks and the impact of each element. Fig. 9 shows that any portion of privatized banks’ shares belongs to the government, semi-government institutes and the Justice Shares are directly towards strengthening the government management control and weakening the private sector involvement in privatized banks. Coincidently, the diffused buyers are benefiting of their participation due to the very small amount of tradable shares of the privatized banks in the TSE and are the good factors to keep the share price high trading the shares in the benefit of capital value of the semi government institutes and the value of the Justice Shares basket.
In focusing on different aspects and effect of the Justice Shares and ownership of semi- government institutes in privatized SOBs the evidence revealed that in case of distributing the allocated Justice Shares to the individuals then, there would be a high probability for rapid re- selling of these shares. Despite of present unofficially trading of these shares, the re-offered 418
Justice Shares could face the demands of three group investors of semi-government institutes, private sector and unofficial credit cooperatives. There is a strong presumption that the semi- government institutes will show the highest tendency towards collecting the offered Justice Shares in case of not missing the retained government’s management control. The unofficial credit cooperatives may participate in this trading mainly because of increasing their role and involvement in official capital market while the resulted profit of this trade would be much lower than what is obtainable through their other current activities. The private sector will have the least chance of participation due to the repeatedly experienced avoidance of the government towards the involvement expansion of the private sector specifically in the area like telecommunication and banking which stand in more political position.
The thesis could not achieve any confirmation in relation with the Justice Shares for any reason. However, the study’s evidence consistent with the analyzed results concluded that the vulnerability imposed through the Justice Shares proportion to the privatized banks (as a part of private banking) will be exist as long as the concept of Justice Shares exist either as the allocated shares under the control of provincial investment companies or as the distributed shares to the individuals.
The government justified the ceding of privatized SOEs (including SOBs) to semi-government institutes as the first step of gradual privatization towards transferring the ownership and management control to the private sector. It was claimed that as time passes, the semi- government institutes will re-offer their share to the market and provide the opportunity for the private sector in the capital market to increase its involvement in economic activities through buying the re-offered shares. The results of the thesis along with the general evidence and believes indicate that the probability of occurring such an event (re-offering the shares by semi-government institutes) is close to zero. In other words, the aforementioned government’s justification is more an elusive assumption rather than a probable event.
The legally approved of 20% ownership for the government (Fig.9) in the privatized banks has also been noticed in this study in case of finding out its effect from different aspects. Consistent to the reviewed literature, the results in this study was totally towards relinquishing
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the full ownership of the governments in all the proposed cases related to the success of banks privatization and success in continuation of the private banking.
Comparative study and evaluation of different factors’ effects in successful continuation of private banking
The thesis compared the existed situation of private banking in Iran with the current potentialities and international banking standards and the probable future improvement in performance of privatized banks at the existed condition. Additionally, the thesis evaluated the effective factor for performance improvement of privatized banks, different practical change in the ownership combination of the privatized banks toward providing an improving condition for the future of private banking in Iran. The concluded results for each of the aforesaid study and evaluation are being described in the fallowing four conclusion groups.
First, in case of successful continuation of private banking the present condition of private banks in Iran and its conformity with the current potentialities and International banking standards show that at the date of this study:
At the current condition the Central Bank of Iran neither is independently active nor has the capability of applying an independent observation. Any weakness in related laws and regulations of banking industry are also emanated from this structural incapability. Not enjoyment of stable economic decision making addition to implementing the periodic shock therapy by government has been a frustrating factor for the domestic investors and will be a red alarm for the foreign investors. Any evaluated factor that may have any relation with international interaction or coordination has got the least credit or conformity score in this part. By factors means, foreign investor in ownership combination of private and privatized banks, the opportunity for the private and privatized banks to expand their banking and investment activities in abroad, the intention of international institutes to rank the banks, presence of foreign auditors or consultants in banking affairs
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The findings strongly indicate that the existed political condition of the country has imposed an extensive deprivation on the banking system in the case of linkage to the international financial domain.
Second, under the ceteris paribus assumption there is some predictions for the short future of the privatized SOBs as follow:
E-banking will be expanded partly because of general inevitable proceedings in banking system and partly because of a show off opportunity for the managements of privatized SOBs, no matter for what cost. The increase in profitability will be demonstrated anyway, mainly as an indication of performance improvement of privatized SOBs regardless of its verity or untruth. Providing the new products would happen mainly to escape of the legal barriers. No indication is found out for reduction of government’s intervention.
Third, the ownership combination has been defined as one of the major different between existed situation of the private and privatized banks. Therefore, it necessitated finding out any effectiveness in the change of ownership structure of privatized SOBs in case of providing the success condition in continuation of private banking. It was concluded that relinquishing the government’s ownership and restricting the total ownership of semi-government institutes are highly concerned. However, such a positive recognition is very behind of the effect that could be emanated from foreign investor participation in the ownership structure of the privatized SOBs.
Fourth, the thesis achieved two distinguished findings as the factors with highest leading impact towards success in continuation of private banking of Iran as:
Enjoyment of independent and full authorized Central Bank equipped with high qualified expertise body. Welcoming the foreign investors to participate in bank’s ownership.
The first finding about an independent Central Bank is in fact one of the regular basic standards of banking rather than an original finding. Therefore, the importance weight of this 421
finding is to magnify the lacking of an independent and infirm Central Bank in the banking system of the country rather than expressing its necessitation.
The second finding about the importance and effectiveness of foreign investors’ participation faced the highest positive responds whenever it was pointed for any reason. It fallows a comprehensive description of what the private banking condition “is” with the recommendation about what it could “be”.
Required condition to optimize the effective factor in successful continuation of private banking
Generally, political power is the consequence of economic power in developing countries. Therefore, in any authoritarian regime that indebted its existence to its economic power, if the private sector is not committed and depended to the desire of governing power reciprocally, it is condemned to be subjugated instead of being promoted and benefits the chance of optimizing its initiatives.
This fact however, has been pictured in this study by demonstrating the determinant of the government in retaining its dominance through the constructed ownership combination in privatized banks and through the continuous intervention and increasing the ownership portion of the semi-government institutes in private banks. Consequently, the powering and dominance of the state in economic activities in the cost of eliminating the private sector addition to the disconnected conditions with the international financial network that has caused the banking system to operate as a malformed creature, all in all, would be the gist of reasoning the absence of foreign investors’ participation in private banking of Iran. It is consistent with the emphasized result of the study’s analysis stating the need of providing the required condition for attracting the foreign investors. In other words, it indicates that the foreign investor attraction cannot be considered as a sectional event and it requires a fundamental and thorough change in the viewpoint of the regime that reciprocally would cause the strategic change in government’s mission and consequently may rebuild the banks’ operational linkage with the international network.
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Limitations
The main limitations of this study specifically were in the two areas of information and politic.
Generally, one of the obligations for any government is to institutionalize the comprehensive and unified methods of information system and facilitates the accessibility to the accurate statistics and reports. However, in the current condition of the country there is no unified method to provide the official data and reports within the Central Bank and all other related institutes and organizations as the highest responsible information reporters of the country. The countrywide reports are mainly being engineered and rebuild rather than being explored from the facts and accurate figures. The different implemented reporting methods are mainly due to the disparate objectives of the information providers. Consequently, under the circumstances emanated from such a nationwide abnormal information system the accurate information of the Central Bank was mostly confidential, the information provided by the banks themselves were out of date, the information demonstrated by TSE (Tehran Stock Exchange) was inadequately limited and faulty, the information provided by IPO (Iran Privatization Organization) was accumulated opaque data, no information was provided by Statistic Center of Iran addition to the wide contradiction within all of them.
The subject of bank privatization like most other subjects in Iran is so politicized that makes all the involvers to feel inconvenient in all the aspects of asking, answering, referring and even collecting the required data. Alternatively, access to the information through the privatized banks or the related officials was so complicated if not impossible.
Future opportunities for research
The mentioned originality of this thesis as the pioneer work on bank privatization in Iran draws a long and wide route of further studies especially about the deficiencies that are existed in the course of successful continuation of private banking in Iran. This study has been a first step to provide a perspective of privatized and private banks, to magnify the existed situation including the problems and, analyze the various practical methods towards the performance improvement in private banking.
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Although, the findings of this study indicates that the existed obstacles are mainly emanated from the vision of the regime and the consequent opportunity that has provided for the government to define and implement its conformed mission in the area of any economic activity including privatization yet, it is necessary to develop more studies to modify the finding of this study. In addition, it is appropriate to retain the results of this thesis for further studies that could be a beneficial approach towards the future of private banking in Iran. Therefore, the first recommended is to study the existed laws and regulation related to the private sector and semi-government ownership in the private banks and identify the dark sides and deficiencies that are contradicted with or not adequate for the expansion of private sectors’ involvement in banking industry. The second study can be in the area of comparative cross study of ownership structure of private banks and related issues from the viewpoint of corporate governance with the objective of modeling practical framework for the private banking in Iran. Finally, according to the undeniable progressive evidence in the area of privatization in democratic countries which is entirely opposite to the historical suffering of my nation from deprivation of freedom, I strongly believe in the necessitation and usefulness of studying the relation between the degree of the democracy and the success of privatization in developing countries.
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Abbreviations
AFR: Africa
CBA’s: Commonwealth Bank of Australia’s
CCE: Central and Eastern Europe
CEFTA: Central European Free Trade Association
CEGB: Central Electricity Generating Board
EAP: East Asia and Pacific
EBRD: European Bank for Reconstruction and Development
ECA: Central Asia
EOPC-44: The Especial Observing Parliament Committee on the Execution of the Article 44
FDI: Foreign Direct Investment 354
FSU: Former Soviet Union
GDP: Gross Domestic Product
HBC: Hard Budget Constraint
IMF: International Monetary Fund
IPO: Initial Public Offering
IPO: Iran Privatization Organization
ITC: Iran Telecommunication Company 455
M & A: Merger and acquisition
MBO: Management buyout
MENA: Middle East and North Africa
NASDAQ: National Association of Securities Dealers Automated Quotations
Non-OECD: Developing Countries
OECD: Developed Countries
PBs: Private Banks
PIF: Privatization Investment Fund
Rl.: Iranian currency of Rial
SAR: South Asia
SBC: Soft Budget Constraint
SIP: Share-issue Privatization
SOB: State-Owned Bank
SOE: Stare-Owned Enterprise
TSE: Tehran Stock Exchange
WP: Working Paper
WTO: World Trade Organization
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Table of Appendixes
Appendix 1: Article 44 of the Constitution Law of Islamic Republic of Iran 459
Appendix 2: The Law of the Third Economic, Social and Cultural Development Plan of the Islamic Republic of Iran 460
Appendix 3: The Law of the Fourth Economic, Social and Cultural Development of the Islamic Republicn of Ira 469
Appendix 4: In the Name of God, the Merciful and the Compassionate 474
Appendix 5: The general policies of the Article 44 of the Constitution of the Islamic Republic of Iran 475
Appendix 6: The response o the Leader of the Islamic Republic of Iran to the proposal of the President to allocate a part of the shares of state‐owned companies 484
Appendix 7: Decree of the Council of Ministers Executive by Law of Increasing Iranian Household’s Wealth through Expanding Cooperative Sector’s Share on the basis of Justice Shares Distribution 486
Appendix 8: The Listn of Irania Banks and Insurance Companies 492
Appendix 9: Questioner 494
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Appendixes
Appendix 1
Article 44 of the Constitution Law of the Islamic Republic of Iran
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.
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Appendix 2
The Law of the Third Economic, Social and Cultural Development Plan of the Islamic Republic of Iran, Ratified in 1999, (2000-2004)
Chapter three: divestiture of the shares and management of the state-owned enterprises
Article 9- In order to enhance efficiency and to raise productivity in utilization of the country’s material and human resources, to streamline government in the area of policy making, and also in order to promote the role and scope of the private and cooperative sectors, the shares and stocks of the state-owned enterprises that are transferable and whose continued operation in the public sector seems to be unnecessary, shall be sold to the cooperative and private sectors on the basis of the regulations set forth by this Law. Under equal conditions, priority shall be given to the War Veterans.
Article 10- Observation of the following points is mandatory in divestiture of the shares:
Divestiture shall be considered as a means of realization of the plan objectives, and not as an end in itself. Divestiture shall be undertaken in the context of the Constitutional Law. It shall not jeopardize national security of cerate any instability in the sovereignty of the Islamic Republic of Iran. It shall not undermine the system’s sovereignty or infringe upon people’s right, or create any monopoly. It shall result in a healthier and more efficient management. It shall promote public participation to the widest possible extent.
Article 11- Shares belonged to the following entities are subject to the regulations of this Chapter: ministries, government agencies, state-owned enterprises stipulated in Article (4) of the State General Audit Law ratified on Aug. 22,1987 and its following amendments, profit making entities affiliated with the government and other companies with more than fifty percent (50%) of their equity and/or their shares, in totally or in part, owned by ministries,
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public entities, state-owned enterprises (except banks, credit institutions and insurance companies), other state-owned companies and profit-making entities affiliated with the government whose subjection to public laws and regulations necessitates that their names be mentioned or stipulated, including Iranian National Oil Company, companies controlled by or affiliated to the Ministry of Petroleum and their subsidiaries, Iran Industrial Development and Renovation Organization and its subsidiaries, and the Center for Procurement and Distribution of Goods; also shares owned by the above-mentioned entities in non-public enterprises and companies that are subject to special law.
Note 1- Shares owned by the entities stipulated in this Article, either possessed through donation, unchangeable conveyance or any other contract, are also subject to regulations of this Chapter.
Note 2- Any partnership of, and investment by the state banks, insurance companies and credit institutions in the corporate sector shall be exempted from regulations of this Chapter.
Article 12- In order to coordinate, supervise and control the process of divestiture and to secure proper execution of the regulations of this Law, the “High Commission of Divestiture” shall be set up under the chairmanship of the Minister of Economic Affairs and Finance.
Secretariat of the Commission shall be housed in the Ministry of Economic Affairs and Finance.
Article 13- The High Commission of Divestiture shall consist of the following seven members:
Minister of Economic Affairs and Finance (Chairman of the Commission) Head of the state Management and Planning Organization The Governor of the Central Bank of the Islamic Republic of Iran The relevant minister Minister of Justice
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Representatives of the Parliamentary Commissions of “Economic Affairs”, and “Plan and Budget” (one representative from each), as observer selected by the Islamic Consultative Assembly
Article 14- Mandates and powers of the High Commission of Divestiture are as follows:
To confirm list of companies to be sold, dissolved or merged, submitted by the relevant ministries or Ministry of Economic Affairs and Finance, and to present it to the Council of Ministers for approval. The report shall include a specific time-table for each case and an explanation of the method of ceding in light of the market conditions. To prepare an annual program of sales, dissolution, of merging of companies within the framework of the approbation of the Council of Ministers, including formulation of the necessary executive policies and strategies. To monitor the divestiture process and to present semi-annual progress reports to the Speaker of the Islamic Consultative Assembly. The report shall include an analysis of the strength and weakness of the program, the process feedback and headway strategies. To organize cultural and publicity activities in order to promote divestiture. To propose to the Council of Ministers the draft of a By-Law for an installment payment plan in cases of necessity. To exercise methods of share pricing, discounts and to determine modes of payments by the buyers in the context of the By-Law, approved by the Council of Ministers. To approve directives for establishing priorities in sales of the shares of transferable companies, as proposed by the Secretariat. To approve directives for preparation of the sales of shares and divestiture contracts, proposed by the Secretariat. To approve criteria for collection of the proceeds of the sales of goods, subject of Article (18) of this Law, proposed by the Secretariat To approve criteria for evaluation of the capacity, credit worthiness, obligations of the buyer, and the guarantee requirements in order to facilitate selection of the buyers, proposed by the Secretariat.
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Note– In special cases that there is no possibility for sales through stock market or tender bid due to the problems in financial structure and human resources or attraction of technology and know-how and capital, the sales shall be accomplished through negotiation in accordance with the By-Law which shall be approved by Council of Ministers at proposal of Ministry of Economic Affairs and Finance.
The Ministry of Economic Affairs and Finance is obliged to inform the said cases to public notice before negotiation through widely circulated dailies.
Article 15- Government shall set up an Organization for privatization by modifying the articles of association of the Organization for Promotion of Ownership of Production Units. Shares of the companies that are appraised and their modes of sales and the time-table determined by the High Commission of Divestiture, shall be given in trust by their holding companies to this Organization to process the divestiture.
The executive By-Law of this Article and revision of the articles of association of the said Organization shall be proposed by the Ministry of Economic Affairs and Finance and the Plan and Budget Organization to the Council of Ministers for Approval.
Note– The responsibility for base pricing and sales of companies shares which are at the sales list based on Approval of the High Commission of Divestiture and approval of the Council of Ministers shall be borne by the Minister of Economic Affairs and Finance as of approval date by Council of Ministers.
The concerned specialized holding companies are obliged to submit the financial information and required documentation to Privatization Organization at most within two months.
Article 16 – The preferred shares shall be conferred upon the workers and employees of the divesting units. Also the Government may divest shares to the state Organization s, retirement funds and its employees against their claims based on their agreement. The ways and means for divesting the shares shall be in accordance with the By-Law which is Proposed by the Council of Ministers and approved by the High Commission of Divestiture.
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Article 17- Directive for regulating of contracts of ceding, outsourcing management, rent, and mode of revocation of these contracts shall be approved by the High Commission of Divestiture. In preparation of the said directive, the Commission shall take the following measures:
To determine the extent of the buyers commitments toward employment, production program, new investment, special activities to protect the environment, and avoidance of certain restrictive commercial activities and etc. To determine the manner of discounting in the share valuation by government in lieu of commitments on the part of the buyers, with regard to the By-Law of Item (F) of Article(14) of this Law. To assess the impact of tax obligations in the share pricing and valuation. To determine conditions for revocation of the contract by both parties. To assess capacities, credit worthiness, obligations, and guarantee requirements of the buyers.
Article 18- In observation of the forty three (43) and forty four (44) Principles of the Constitutional Law, government may rent out through tender to cooperative companies and/or to the private sector, the industrial, agricultural and service companies and public properties held in its possession, in lieu of cash or kind, while retaining the ownership rights. In doing so the following conditions shall prevail:
On the basis of the rental contract, government shall be entitled to receive annually, certain amount in cash or kind against depreciation, renovation, maintenance, or expansion of the rented companies. In the course of divestiture of state-owned enterprises or other properties specified in this Article, the party to the contract shall be charged with observing certain regulations and government policies with regard to pricing, production planning, distribution, and securing public interests. Outsourcing management of the state-owned enterprises to non-governmental sectors shall be permissible on the sole condition that the real or legal person to whom the management shall be assigned will perform the obligations and duties in person during 463
the term of the contract. As such, the contract shall not be transferable to any other company or entity. Breach of violation of this condition will result in violator on the ground of unlawful possession of the government properties. In the process of divestiture of the companies or other properties specified in this Article, and in screening the candidates, should the qualified employees of any of these entities set up a cooperative, this cooperative company will entertain preference over other candidate.
Note- Method of computing the compensation in cash or kind shall be determined within the framework of the criteria to be approved and promulgated by the High Commission of Divestiture.
Article 19- Revenues from sales of the companies’ shares, sales of properties, rental contracts and all other contracts content of this Chapter within the given fiscal period and after being transferred to the Treasury shall be spent as follows.
Fifty percent (50%) for restructuring salable companies, rehabilitation and pre Item ton of other companies for sale, as well as promoting industrial development, with preference given to paying off the salable companies’ debt. The amount shall be paid to the account of the holding companies. Fifty percent (50%) to support the country’s Treasury.
Note- Taking advantage of the resources in Item (A) of this Article for development of industry and mine including execution of new industrial and mineral projects, development of capacity of existing production lines, increment of the capital of industrial and manufacturing companies or partnership in industrial projects more than 51% in form of direct investment by the specialized holding companies and/or the affiliated companies shall be authorized and permissible subject to the fact that upon publishing the notice in widely circulated dailies it is proven that the non-governmental sectors are not ready for investment in said projects.
The State Management and Planning Organization and the general assembly’s presidents of specialized holding companies are responsible for supervision on execution of this note.
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Article 20- Dispute settlement pertaining to claims made by real or legal persons against any of the decisions on the matter of divestiture is entrusted to the Arbitration Commission. This subject shall be included in the divestiture contracts and shall be endorsed by both parties.
Article 21- The Arbitration Commission subject of Article (20) of this Law is composed of the following members:
Five experts in economics, finance, commerce, technical and legal fields to be jointly nominated by the Minister of Economic Affairs and Finance, Minister of Justice, and the Head of the “State Planning and Management Organization ”, and to be approved by the Council of Ministers. The appointments shall be made for a period of six years. Head of the Chamber of Cooperatives. President of the Chamber of Commerce, Industry and Mine of the Islamic Republic of Iran.
The Arbitration Commission shall review the claims and disputes and make decision pertaining to the divestiture. The procedures governing meetings of the Commission and methods of decision making shall be formulated in a By-Law to be approved by the Council of Ministers.
Article 22- Quorum of the Arbitration Commission will be reached by presence of at least five members; and decision will be made by the majority votes of the participants. (Opinion of the minorities must be recorded in a process verbal and endorsed.)
Article 23- Decisions of the Arbitration Commission shall be binding ten days after notification to the parties. Should any of the parties raise any objection, the party may put its objection in writing within the above grace period, or thereafter in case there is definite reason for delay, and submit it to a competent court. The Chief Justice shall refer the case to a special tribunal which will review the case extraordinarily and rule a judgment. The court ruling is final and binding.
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Article 24- Government is obliged to insure at its own expense all the officials who individually or collectively are engaged in carrying out the divestiture operation, against any possible penal or financial conviction that could be bought off and any indemnifying conviction emanating from unintentional misconduct in connection with divestiture. The insurance converge shall be such as to enable the insurer to compensate for whatever cost to be borne by the convicted official (s).
Article 25- Beginning with the date of sales of the shares, the specialized holding company shall be liable for payment of any compensation in connection with losses incurred prior to the sales of shares of the nationalized or expropriated companies to the private or cooperative sector.
Note- The divested company shall remain liable for payment of any other debt. Article 26- Shares sold according to this Law, as well as shares transferred between the executive agencies in enforcing this Law are exempted from transaction tax.
Also, government or the concerned executive agency shall remain liable for payment of corporate income tax -finalized or not finalized- of the divested companies whose total (100%) shares belong to government (ministries and other public agencies) and state-owned enterprises, up to the end of the fiscal year prior to the sales.
Article 27- Employees of the state-owned enterprises who subject to the pension rules, are related to the special pension funds affiliated to ministries, the public agencies and the state- owned enterprises, and whose employment with the divested company will be terminated upon the sales of the shares to the private and cooperative sectors, may, upon reinstatement of their employment with the same company, continue to stay with the same pension fund, provided that they observe the regulations of the pension scheme in the payment of the insured and employer’s premiums.
Note- All laws and regulations pertaining to social insurance deductions and the authority of the Social Security Organization governing insurance charges, late payment/delinquent
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penalties including provisions of Article (49) and (50) of the Social Security Law ratified in 1975 applicable to the above-mentioned individuals and funds shall remain in force.
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Appendix 3
The Law of the Fourth Economic, Social and Cultural Development Plan of the Islamic Republic of Iran, Ratified in 2004, (2005-2009)
Chapter one:
Fundamental preparation for rapid economic growth (orders related to divesture of the shares)
Article 6- In context of general policies of the Fourth Economic, Social and Cultural Development Plan of the Islamic Republic of Iran including the cases subject mentioned in initial part of the forty four (44) Principle of the Islamic Republic of Iran Constitutional Law, for purpose of continuation of privatization plan and strengthening the non-governmental sectors in development of Iran, the government is permitted and authorized:
To use all the possible methods including de-regularization, outsourcing of the management (like lease, general contracting and management contract) and ownership/possession (like lease subject to possession, sales of shares totally or partially, assignment of the properties), analysis for divesting, dissolution and integration of companies.
Article 7- For the purpose of organizing and desirable and optimized use of the governmental companies and increment of output and efficiency and desirable administration of the companies which are needed to be remained in public sectors and also for providing the grounds for divesting the companies whose activity continuation isn’t necessary in public sector, to the non-governmental sector, the administration is permitted to take action for divesting, dissolution, integration and re-organization of the governmental companies, amendment and approval of the company’s articles of association, approval of the financial and transaction by-laws, approval of the employment and insurance by-laws, subject to observing related rules and regulations and replacement and transfer of tasks, human resources, shares and assets of the governmental companies and the subsidiaries, and subject to observing the following points:
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A- All the affairs related to policy making and exercise of the tasks and duties of state sovereign shall be separated from the state companies and entrusted to the concerned specialized ministries and governmental establishments by the end of the second year of the plan. B- The governmental companies are to be organized merely in context of the specialized holding companies and the operational companies (the second generation) and shall be administer under supervision of the general assembly in context and scope of the company articles of association. Such companies shall be subject to rules and regulations of the related specialized ministries as far as policies and sector plans may concern.
Note 1- Formation of the governmental companies shall be permissible merely by ratification of Islamic Consultative Assembly and it is forbidden to convert the companies in where governmental companies hold less than 50% of their shares into to the governmental ones .
Note 2- Partnership and investment of the governmental companies except the state banks, state credit institutes and the state insurance companies in the other companies subject of this Clause shall require obtaining the prior permission from Council of Ministers.
Note 3- The companies that less than 50% of their shares are hold by the government and governmental companies are considered non-governmental and are not subject to rules and regulations governing the state companies.
Note 4- The government is obliged, at most within two years as of implementation commencement of the Fourth Development Plan based on proposal of State Management and Planning Organization, to change the status of the companies having sovereignty nature into suitable Organizational form and divest the same to the related executive Dept.
Note 5- The governmental companies who have been inoperative and inactive by early 2004, at discernment of State Management & Planning Organization and Ministry of Economic Affairs and Finance, are not permissible to commence their activity and are declared dissolved.
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Note 6- The government is obliged to dissolve all the offices and branches of governmental companies stationed abroad by end of the first year of the Plan. The necessary cases shall be approved by High Council of Administrative based on proposal of Ministry of Economic Affairs and Finance and State Management & Planning Organization.
C- The governmental companies which are liable to divesting to the non-governmental sector by approval of the Council of Ministers, shall not subject of rules and regulations governing the governmental companies merely within the fixed moratorium in High Commission of Divestiture and they are run and administered in context of the Commercial Law. D- Continuation of the activity of the governmental companies shall be possible merely in the following conditions: 1- Their activity is exclusive. 2- The non-governmental sector has no motivation for activity in that field. E- Conversion of the status of the employees of companies` subject of Note (4), Item (B) of this Article by observing the acquired rights to the ministries and governmental establishments, is in context of a By-Law which shall be approved by the Council of Ministers. F- Transaction of the shares in relation with execution of this Article (due to integration, dissolution and re-Organization) shall be exempted from tax payment. G- The ownership right of the government in specialized holding companies (except the companies whose chair is assigned to the President) shall be exercised at discernment of the government through Ministry of Economic Affairs and Finance or the Organization for Ownership of Governmental Companies which shall be formed under supervision of the President (by discernment of government), based on instrument of this Act and the government is obliged to take legal action for amending the articles of associations of these companies group in an appropriate manner. The probable financial charges for convention of the said Organization shall be financed from the concentrated items available to the President. All the companies whose subjection to laws and regulations necessitates that their names be mentioned or stipulated, all are subject to this clause.
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Note- The articles of association of this Organization shall be approved by the Council of Ministers based on proposal of the State Management and Planning Organization.
H- The specialized holding companies could be divested subject to observing the forty four (44) Principle of the Islamic Republic of Iran Constitutional Law and the partnership of the private and cooperative sectors are permissible and authorized. The ways and means and partnership method of the private and cooperative sectors in specialized holding companies shall be approved by the Council of Ministers based on proposal of the concerned General Assembly of the companies and confirmation by the High Commission of Divestiture I- The government is obliged, at most by the third year of the Plan, to take action for correction of the structure and profitability of the governmental companies which are considered loss-making companies based on financial statement of the first year of the Plan or otherwise, to dissolve them.
O- All the executive bodies’ subject of Article (160) of this Act shall be liable and subject to provision of this Article.
Article 8- The fund earned from sales of governmental companies shares shall be concentrated before the Islamic Republic of Iran Central Bank in the name of Treasury and shall be allocated as follows and is transferred to the related accounts:
A- Equal to 20% as in part-payment of tax on performance of the concerned specialized holding companies or companies under their coverage (account of state general revenue) B- Equal to 10% as in part-payment of interest of government portion in concerned specialized holding company (account of state general revenue) C- Equal to 70% to the account of concerned specialized holding company for the following affairs: 1- payment of the debts of specialized holding company to the government (ministries, governmental establishments and Treasury) 2- Preparation, betterment and correction of the structure of governmental companies for divesting. 471
3- Assistance for supplying the charges for modification of human resources and technical and professional education/training of the employees of the companies could be divested. 4- Assistance for enabling and strengthening the private and cooperative sectors as to their economic activities in context of annual budgets. 5- Completion of semi-finished projects and investment in context of the approved budget.
Note 1- The entire sums due sales of shares belonging to the government (in name of the ministries and governmental establishments) must be deposited to the state general revenue account.
Note 2- The difference of the book price of shares and their sales price in shares sales year shall be included in the profit and loss account of the same years of the concerned specialized holding company (or the companies under their coverage and supervision).
Article 9- The Articles 10, 12 to 18 and 20 to 27 of the Third Economic, Social and Cultural Development Plan of the Islamic Republic of Iran, ratified on April.6, 2000 and its amendments, for the Fourth Plan period (2005-2009) are hereby confirmed to be effective.
Article 16- The government is permissible to divest the shares of commercial insurance companies to private sector or cooperative, upon correction of the structure, based on specific scheduled plan and according to the By-Law approved by Council of Ministers in context of Item (47) of policies of Fourth Development Plan - which shall be notified-
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Appendix 4
In the Name of God, the Merciful and Compassionate
I hereby announce the general policies of the Article 44 of the Constitution of the Islamic Republic of Iran. There are a number of observations and remarks in this regard that I should underline.
1- The implementation of these policies requires new legislations or possibly changes in the existing laws and the government and Majlis (parliament) need to cooperate with each other for this purpose. 2- The supervision of the State Expediency Council over the good performance of these policies is essential. This can be achieved by putting in place the required procedures, collaboration of the relevant responsible agencies and presentation of regular annual supervisory reports on a specific date. 3- The decision regarding “ general policies on development of non-state sector through entrusting activities and ownership of state-owned enterprises” will be made upon receiving reports, documentary evidence, and comprehensive consultative opinions of the State Expediency Council on the relationships between privatization and each of the elements under Article 44, on how different factors can have adverse impact on the efficiency of some state-owned enterprises, the implications of the transfer and ceding activity of the relevant enterprises to the non-state sector under Article 44, on the level of preparedness of the non-state sector and on sanctions and the ways available to the government to exercise its authority.
Seyyed Ali Khamenei
22 May 2005
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Appendix 5
The general policies Of the Article 44 of the Constitution of the Islamic Republic of Iran June –July 2006
The economic system of the Islamic Republic of Iran shall be based on public, cooperative and private sectors, with proper and sound planning.
The public sector includes all large-scale industries, mother industries, foreign trade, large mines, banking, insurance, power supply, dams and large irrigation channels, radio and television, post, telegraph and telephone, aviation, shipping, roads, rails and the like, which are public property and at the disposal of the Government.
The cooperative sector includes cooperative production and distribution companies and institutions established in cities and villages on the basis of Islamic principles.
The private sector includes such activities related to agriculture, cattle-raising, industry, trade and services that supplement the economic activities of public and cooperative sectors.
Ownership in the aforesaid three sectors, insofar as it conforms to other articles of this chapter, does not surpass the limits of Islamic laws, contributes to economic growth and development of the country, and does not harm the society, shall enjoy protection of law in the Islamic Republic.
Details of regulations, scope and conditions of the three sectors shall be determined by law.
General Policies and Objectives of Article 44
In view of the provisions enshrined under article 44 and in Article 43, general policies of Article 44 of the Constitution of the Islamic Republic of Iran is intended to achieve the following objectives:
Accelerated growth of national economy.
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Promotion of broad-based public ownership to achieve greater social justice. Enhancing the efficiency of economic enterprises and productivity of human and material resources and technology. Enhancing the competitive capability of the national economy. Reducing financial and administrative burden on the government encumbered as a result of its controlling role in economic activities. Increasing the general level of employment.
To achieve the aforesaid objectives, the following guiding principles were agreed upon:
A- General policies concerning development of non-state sector and preventing the unnecessary growth of the government. 1- The government shall not be allowed to engage in economic activities that fall outside those envisioned in Article 44. Moreover, it is obliged to relinquish any activity, including continuation and operation of previous activities that are covered under Article 44, and cede them (at least 20 percent annually) to the private and cooperative sectors by the end of the Fourth Five-Year Development Plan. Considering that the government has the overall responsibility to ensure good governance, the continuation and initiation of essential activities by the government that fall outside of the main titles of Article 44 are permitted for a definite period of time, upon the proposal of the Council of Ministers and approval of the Islamic Consultative Assembly. Industries that are affiliated to the military, police, intelligence and security services that have confidential character do not fall under this decree. 2- Investment in and management and ownership of those sectors that fall under Article 44 by the non-state enterprises and public institutions, and the cooperative and private sectors are permissible as described below:
2-1- Large-scale industries, mother industries (including large downstream oil and gas industries) and large mines (except oil and gas)
2-2- Foreign trade activities in the framework of trade and foreign currency policies of the country
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2-3- Banking operations by non-state public enterprises and institutions, publicly-held cooperatives and joint stock companies, provided maximum shareholding of each shareholder is determined by law.
2-4- Insurance
2-5- Power supply, generation and importation of electricity for domestic consumption and export
2-6- All postal and telecommunication activities, except the main telecommunication grid, assigning of frequencies and main networks of postal exchanges, routing and management of distribution of mails and basic postal services
2-7- Roads and railways
2- 8- Aviation (air transport) and shipping (marine transport).
Optimal share of the State and non-State sectors in the economic activities covered under the preamble of Article 44 will be determined by law by taking into view the sovereignty and independence of the country, social justice and economic development and growth.
B- General policies of the cooperative sector 1- Increasing the share of the cooperative sector in the national economy to 25 percent by the end of the Fifth Five-Year Development Plan. 2- Effective measures by the government to establish cooperatives for the unemployed with a view to generating productive employment. 3- Support by the government to set up and promote cooperatives by offering incentives such as tax concessions, providing concessional credit facilities by all financial institutions, abstaining from receiving any additional levies or other charges in excess of those paid by the private sector. 4- Removal of all barriers and constraints that obstruct the presence of the cooperative sector in all economic arenas, including banking and insurance.
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5- Establishment of the Cooperative Development Bank funded by the government for the purpose of enhancing the share of the cooperative sector in the national economy. 6- Support by the government to enable cooperatives to gain market access and providing this sector full information on non-discriminatory basis. 7- Exercise of the right of sovereignty of the government in the framework of policy- making and overseeing the enforcement of the applicable laws and avoiding interference in the administrative and management affairs of the cooperatives. 8- Development of technical and vocational training and other supportive programs with a view to enhancing efficiency and empowerment of the cooperatives. 9- Flexibility and diversity in methods of raising capital, distribution of shareholding in the cooperative sector and taking necessary measures that set in motion establishment of new cooperatives in addition to the conventional ones in the form of public joint stock companies with fixed limits of shareholding, the ceiling for which will be determined by law. 10- Support by the government of the cooperatives, proportionate to the number of members. 11- Establishment of nationwide cooperatives to cover the three lowest deciles of the population with a view to poverty alleviation. C- General policies on development of the non-state sector and ceding of State-owned enterprises.
In view of the imperative of achieving accelerated economic growth and development on the basis of justice and with a view to poverty alleviation in the context of the Twenty-Year Vision of the country, the following general policies shall be adopted:
Change in the role of government from direct ownership and management of enterprises to policy-making, guidance and overseeing. Economic empowerment of the private and cooperative sectors, and enabling them to enhance competitiveness of their products in international markets. Preparing Iranian enterprises to apply global trading rules intelligently and in a gradual and target-oriented manner.
477
Development of knowledge-based human capital. Development and enhancement of national standards and endeavoring to conform our quality assurance systems to the international standards. Since the overall orientation of the privatization shall be toward improving efficiency, competitiveness and greater public ownership, upon the proposal of the Expediency Council, Note C of the general policies of Article 44 of the Constitution of the Islamic Republic of Iran is promulgated as follows in accordance with paragraph 1 of Article 110.
Eighty percent of the shares of State-owned enterprises, covered under Article 44, shall be ceded to the private sector, joint stock cooperative companies and non-state publicly-held companies as follows:
1- State-owned enterprises engaged in large mining activity, large-scale and mother industries (including large downstream oil and gas industries), except the National Iranian Oil Company and companies involved in extraction and production of oil and gas. 2- State-owned banks, except the Central Bank of Iran, Bank Melli of Iran, Bank Sepah, Bank of Industry and Mines, Bank of Agriculture, Housing Bank (Bank Maskan), and Export Development Bank. 3- State-owned insurance companies, except Bimeh Marakazi and Iran Insurance. 4- Airline and shipping companies, except the Civil Aviation Organization and Ports and Shipping Organization. 5- Power supply companies, except the main electricity transmission grid. 6- Postal and telecommunication companies, except the main telecommunication networks, frequency assignment services and the main and basic postal services. 7- Industries affiliated to the armed forces, except defense and security products and services that are deemed essential by the Commander-in-Chief.
Requirements of ceding the shares:
1- Pricing of shares will be done through the mechanism of the stock exchange.
478
2- Public offering of shares by good promotional campaign and encouraging people to participate, and at the same time preventing formation of monopolies and misuse of privileged information. 3- To ensure proper rate of return on the shares of the companies to be ceded, all necessary reforms with respect to marketability and pricing of products and the management should be carried out on the basis of the Commercial Code of Iran. 4- The ceding of the shares under this plan shall be done through specialized holding companies and subsidiaries, by detailed and professional analyses. 5- For the purpose of reforming the management and enhancing the productivity of the enterprises to be ceded under this plan with a view to making better use of the management capacity of the country, necessary measures need to be taken to recruit experienced, competent and efficient managers. The sale of up to 5% of the shares of the companies, covered under Note C of Article 44, to the managers and employees is permissible. 6- Considering that Note C of the general policies of Article 44 has been promulgated, and in light of the change in the sovereign duties and functions, the government is required to articulate and put into action its new role in policy-making, guidance and overseeing of the national economy. 7- Allocation of a percentage of the resources to be handed over on new fields that apply advanced technologies is allowed in line and in keeping with sovereign duties.
D- General policies concerning ceding of shares of state-owned enterprises
1- Requirements of ceding 1-1- Empowerment of the private and cooperative sectors to engage in extended and diverse activities and to manage large businesses. 1-2- After the completion of the ceding of shares, the overseeing and support by the relevant authorities will continue with a view to achieving the intended objectives. 1-3- Applying generally accepted and sound methods for the ceding of shares with special emphasis on the stock exchange, strengthening the relevant organization set up for this purpose, instituting transparent flow of information, creating equal opportunities for all
479
to benefit from gradual offering of the shares of large enterprises in the stock market for the purpose of obtaining benchmark price of the shares. 1-4- Those involved in ceding of shares and those in the position of decision-making in the government with respect to the ceding operation must not be able to profit from this activity. 1-5- Observance of the general polices of cooperatives in the ceding operation. 2- Applications of the proceeds from ceding operation:
The proceeds from the ceding of shares of state-owned enterprises shall be deposited in the special Treasury Account and disbursed in the framework of approved plans and budgets in the order explained below:
2-1- Making deprived disadvantaged families self-reliant and strengthening the social security system 2-2- Allocation of 30% of the proceeds from the ceding operation to nationwide cooperatives with a view to achieving poverty alleviation 2-3- Creating economic infrastructures by according priority to less developed regions. 2-4- Granting financial facilities (administered funds) to strengthen cooperatives, to modernize and renovate non-state enterprises by giving priority to ceded companies and for the purpose of investments by the non-state sector for the less developed regions. 2-5- Partnership of state-owned enterprises with non-state sectors up to 49% for the economic development of the less developed regions. 2-6- Completion of partially-completed projects of the state-owned enterprises by taking into view note “a” of the general policies.
480
D-1- General policies on application of the right of sovereignty by the government and avoiding creation of monopolies.
1- Continuity in the application of the general right of sovereignty of the government after the commencement of the activities of the non-state sectors as a result of ceding operation through policy-making, enforcement of laws and regulations and overseeing, especially in respect of application of norms of Sharia and the law at non-state banks. 2- Preventing influence and control of aliens over national economy. 3- Preventing creation of monopolies, by the non-state enterprises by putting in place laws and regulations.
481
Appendix 6
The response of the Leader of the Islamic Republic of Iran to the proposal of the President to allocate a part of the shares of state-owned companies
In the Name of Allah, the Merciful, the Compassionate
To: Dr Ahmadinejad, Honourable President of the Islamic Republic of Iran
I endorse your proposal for the allocation of a part of the shares envisaged under Article 44 of the Constitution as follows:
1- I approve the installment sale of 50% of the shares that can be ceded under Note C of the general policies of Article 44 to provincial investment companies consisting of the District Cooperatives. 2- The prices of shares shall be set by the stock market. 3- In respect of the two lowest income deciles of the population, granting 50% percent discount on the prices of ceded shares and allowing installment period of 10 years are permissible. 4- The provincial investment companies shall be admitted to the stock exchange with the help of the government, and shall endeavour to improve their rate of return on investments within the rules of the Commercial Code. 5- The shares covered under the ceding operation shall be ceded to the provincial investment companies in proportion to the number of their employees. 6- Purchase and sale of the shares of the provincial investment companies at the stock exchange are permissible to the extent that of their paid-up installments or the discount allowed to them. 7- Identification of the lowest two deciles of the society by scientific and precise methods and paying special attention to the rural population. 8- The implementation of this plan should not increase or perpetuate government controls over the enterprises covered under the ceding plan.
482
It is noteworthy to mention that although considerable time has passed since the promulgation of the general policies of Article 44, no practical action has been taken and no national campaign has been launched to promote investments and entrepreneurship. Therefore, you are to issue instructions on establishment of a powerful committee to assume the full responsibility for Article 44 and without delay to begin creating favourable conditions to impart impetus and momentum to the economy by embracing and using all national assets and human resources. Broad and widespread public awareness campaign with a view to preventing profiteering by special interest groups, to encourage investments by the public and to improve the business and entrepreneurial climate are highly emphasized.
I pray to the Almighty for your success in serving the great people of Iran and promoting justice.
483
Appendix 7
Decree of the Council of Ministers Executive By-Law of Increasing Iranian Households’ Wealth Through Expanding Cooperative Sector’s Share On the basis of Justice Shares Distribution
The Council of Ministers in its meeting of 12th Nov. 2006, based on proposal No. 31168 of the Ministry of Economics and Finance and with reference to Article One hundred and Eight of the Constitution of the Islamic Republic of Iran and Article 9 of the Fourth Economic, Social and Cultural Development Plan ratified in 2004, approved the By-Law for increasing Iranian households’ wealth through expanding Cooperative Sector’s share on the basis of “Justice Shares Distribution Scheme”, as follows:
Article 1 – In the Present By-Law the following short terms shall have their full meanings as follows:
The Law of Fourth Plan: The Law of the Fourth Economic, Social and Cultural Development Plan of the Islamic Republic of Iran Ratified 2004. Central Headquarters: The Central Headquarters of Justice Shares Distribution which shall be established under the presidency of the President for planning, coordinating and supervising the process of Justice Shares Distribution. Provincial Headquarters: The Provincial Headquarters of Justice Shares Distribution which shall be established in each Province under the presidency of the Governor of the same Province for supervising the process of Justice Shares Distribution in the Province on behalf of the Central Headquarters, within the framework of authorities delegated. Subjects of the Scheme: Individuals included in the two lowest decimal groupings of income classification who by the decision of the Central Headquarters qualify for receiving Justice Shares with priority of first degree. Local Justice Cooperative Companies: Local Justice Cooperative Companies in each city which shall have subjects of the Justice Shares Distribution of the same city as their members. 484
Justice Shares: Shares of the Intermediary Company (the agent company for Justice Shares) which shall be divested to Provincial Investment Companies (Private Joint Stocks). Provincial Investment Company (Private Joint Stocks): Investment Company (Private Joint Stocks) which shall be established by Local Justice Cooperative Companies in each province. The Intermediary Company: The agent company for Justice Shares whose role is to transform the basket of different divested shares into a single unitary share and then divest the shares of the company to Provincial Investment Companies along with other executive works related to the divestiture of the Justice Shares.
Article 2 – Ministry of Economic Affairs and Finance shall have the responsibility of implementing Para “g” of Article 7 of the Law of Fourth Plan and Government ownership right in Specialized Holding Companies (except companies which the President is Chairman of their General Assembly) shall also be exercised through that Ministry.
Article 3 – Ministry of Economic Affairs and Finance, in observing the related laws and regulations and Para “c” of the General Policies of article forty four of the Constitution of the Islamic Republic of Iran decreed by the supreme leader, shall divest all state owned and other government disposable shares to the intermediary company after its formation, and subsequently divest the shares of the intermediary company to Provincial Investment Companies (Private Joint Stock) in proportion to the number of individuals qualified for Justice Shares.
Article 4 – The Central Headquarters shall be composed of the following members:
The President of the Islamic Republic of Iran Minister of Economic Affairs and Finance Head of Management and Planning Organization Minister of Interior Minister of Industries and Mines Minister of Cooperation 485
Minister of Agriculture Crusade Minister of Labor and Social Affairs Minister of Justice Minister of Welfare and Social Security Head of Martyrs and Veterans Affairs Foundation (Bonyad Shahid va Omur Issargaran) Minister of Health, Medical Treatment and Education Commander of “Basij” Resistance Force Head of Imam Khomeini Relief Committee (Komite Emdad Imam Khomeini) Head of State Welfare Organization Head of Country’s Less Developed (Deprived) Regions Office Head of National Organization for civil Registration Head of Privatization Organization
Article 5 – The following are included in authorities of the Central Headquarters:
Divestiture of Justice Shares, observing Article 14 of the Law of Third Plan, reconfirmed in Article 9 of the Fourth Plan; Setting up priority ranking of the subjects of the Scheme; Setting up priority ranking of the provinces; Approval of executive rules and required directives; Determining responsibilities of Provincial Headquarters and supervising their performance; Taking other necessary executive measures for distribution of Justice Shares in the framework of the present By-Law.
Note 1: The authorities of the Council of Ministers in relation to Article 14 of the Law of Third Plan reconfirmed in Article 9 of the Law of Fourth Plan are delegated to the Ministers who are members of the Central Headquarters described in Article 4 of the present Decree. The basis for the decision making regarding those authorities is the agreement of majority of the Ministers who are members of the said Headquarters and their decision, subject to the approval of the President, could be issued by the Minister of Economic Affairs and Finance. 486
Note 2: The meetings of Central Headquarters shall be chaired by the President. In the absence of the President, the Vice President, as vice chairman, shall chair the meetings.
Note 3: The Commander of Basij Resistance Force, Head of imam Khomeini Relief Committee, Head of State Welfare Organization, Head of Less Developed Regions Office, Head of Civil Records Registry and Head of Privatization Organization shall take part in the meetings without voting right.
Note 4: The head of Privatization Organization is hereby appointed as the Secretary of the Central Headquarters.
Article 6 – Representatives of Central Headquarters members in Provinces (except Privatization Organization), shall be appointed as members of the Provincial Headquarters.
Note 1: the Governor of the Province represents the President and shall chair the meetings of Provincial Headquarters.
Note 2: Members of Provincial Headquarters with voting rights shall be appointed as to correspond to the Central Headquarters.
Note 3: The head of Organization of Economic Affairs and Finance in each province shall be appointed as the Secretary to the Provincial Headquarters.
Article 7 – The Central Headquarters shall, by the end of Iranian Calendar year of 1385 (20 March 2007), have implemented Justice Shares Distribution Program in all provinces.
Article 8 – The volume of State shares and Government Shares to be divested to the intermediary company shall correspond to Government capacity and potentials. Divestiture of the intermediary company to Provincial Investment Company shall also be in proportion to the number of Local Justice Cooperative Companies’ members.
Article 9 – The maximum number of each family member to be included for distribution of Justice Shares is 5. In cases where the members of the family are more than 5, the 487
corresponding number of shares to 5 shall be divided amongst the family members and no additional share shall be allocated. Each member of the families with members of more than five shall be regarded as an independent member of the Local Justice Shares Cooperative (though with less number of shares) and their share of the Cooperative’s profit shall be in proportion to their number of shares.
Article 10 – Share pricing mechanism of companies which are subject of this Decree shall be the price index of the company’s share for companies quoted in Stock Exchange Market and the normal business practices of demand and supply, and the price mechanism set in the By- Law of Para “f” of Article 14 of the Law of Third Plan reconfirmed in Article 9 of the Law of Fourth Plan, for Stock Exchange non-registered companies.
Article 11 - The Privatization Organization, on behalf of state shareholders, shall by signing a contract with the intermediary company and Provincial Investment Companies (Private Joint Stock) in which operational guarantees shall also be included, take the necessary measures to settle the accounts of divested shares in the installment system, at the end of the installment payment period, which shall not exceed 10 years, and in proportion to the interest received from the intermediary company. The price of the shares of subject of this article shall benefit from a discount of 50 percent and no interest shall be charged on the installments.
Article 12 – To preserve and continue the activity of the firms, parts of whose shares are divested, the High Commission of Divestiture, subject of Article 13 of the Law of Third Plan reconfirmed in Article 9 of the Fourth Plan, shall take necessary measures through supervising and controlling the divestiture process, so that a maximum of 20 percent of the shares of each company is divested as a block of shares, outside the head paragraph of Article 44 of the Constitution. The above blocks of shares (20 percent) shall remain in Government ownership in the case of the companies included in the head paragraph of Article 44 of the Constitution.
Article 13 – This By-Law (Decree) shall be implemented from the date of its approval and replaces the Executive By-Law of Increasing Iranian Household Wealth through Expansion of Cooperatives Share on the Basis of Justice Shares Distribution, the subject of Decree No. H33484 T/72683 dated 6th February 2006. Ministry of Economic Affairs and Finance shall 488
prepare and submit to the council of Ministers its implementation progress report every three months.
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Appendix 8
The list of Iranian Banks and Insurance Companies
State-Owned Privatized Private
Banks:
Melli Mellat Karafarin
Sepah Tejarat Parsian
Maskan Saderat Saman
Keshavarzi Post Bank Eghtesad-e Novin
Sanaat-o Maadan Sarmayeh
Refahe Karegaran Pasargad
Tose-aa Saderat Iran Sina
Tose-aa Taavon Tat
Gharzolhasaneh-e Mehr Iran Bank Ansar
Shahr
Day
Gardeshgari*
Hekmat*
Arian*
490
Iran Zamin*
Tose-aa Farda*
Insurance Companies:
Iran Asia Karafarin
Alborz Parsian
Dana Saman
Mellat
Day
Pasargad
Eghtasad-e Novin
Farhangian
*In the process of registration at the time of the study
491
Appendix 9
Questioner
Confidential
Name and Family (Optional) …
Work experience …………………………………………… year
Work experience in governmental sector ……… year
Work experience in private sector ……………….. Year
Teaching and research experience ………………. Year
Interview Questioner Both
Date:
Signature: ………………………….
492
State- Owned Banks Privatization in Iran
Objective: Collecting the ideas about pre-privatization and execution stages and results.
Pre-privatization Stage
1- At the time of share-offering of the state owned bank (SOBs), how much the market condition and investor`s potential was considered?
Completely Moderately Little None Unclear
2- Could the government re-structure the organization of SOBs before privatization better than private owners after privatization?
Completely Moderately Little None Unclear
3- Did the organization re-structuring of the SOBs happen before their privatization?
Completely Moderately Little None Unclear
4- Did the financial re-structuring of the SOBs happen before their privatization?
Completely Moderately Little None Unclear
5- Does buyers’ qualification matter in SOBs privatization?
Completely Moderately Little None Unclear
6- Regarding the new ownership combination of the privatized SOBs how the new owners’ qualification was taken into account?
Completely Moderately Little None Unclear
493
Execution Stage
7- Is the executed ceding in contradiction with the objectives of preventing the enlarging of government’s size and reduction of its incumbency in economic activities?
Yes Moderately No
8- Is the executed ceding conformed to the objective of strengthening and developing the private sector’s activity?
Yes Moderately No
9- Is the executed ceding intentionally implemented to prevent reduction of government’s control and incumbency?
Yes Moderately No
10- Were the required regulations of Tehran Stock Exchange (TSE) acceptably considered during the share offering of SOBs?
Yes Moderately No
Privatized and Private Banks
Objective: Collecting the ideas on identifying the resulted conditions and the challenges in front.
11- Regarding the owners’ combination of privatized SOBs: a) Has the ownership of privatized banks been transferred to the private sector?
Yes No
b) Has the management control of privatized banks been transferred to the private sector?
Yes No 494
c) Can the appointed managers of privatized banks avoid the orderly interventions of the government in their policy and decision makings?
Very Much Very Moderately Little None
12- How probable is the re-offering of the Justice Shares by their primary owners (the identified lowest income level people)
Very much Very Moderately Little None
13- Considering the high number and scattered owners of the Justice Shares and assuming the resell interest of only half of them (including 21 million shareholders and ceded value of 14000 billion Rl.), evaluate the tendency of following groups to collect the re-offered shares in the period of 2011-2014.
Very No. Investor group Very Considerable little Much
1 Private sector
2 Semi-government institutes
3 Unofficial credit cooperatives
14- How probable is the re-offering of the privatized banks’ shares by semi-government institutes during the Fifth Economic Development Plan (2011-2015)?
Very Moderately Little None Unpredictable
15- By assuming the occurrence of above re-offering, how much it may strengthen the role of the private sector in banking industry?
Very Moderately Little None Unpredictable
495
16- Was it the right decision to limit the SOBs privatization to four banks (Mellat, Saderat, Tejarat and Post Bank)? Yes No 17- Evaluate the average trend of following elements in four privatized banks for the next 2 years (till the end of 2012).
Very No. Subject Very Normal Little Imperceptible Much
1 Profit Increase
2 Cost Reduction
3 E-banking development
4 New products providing
5 Implementing more competitive policies
More implementation of international 6 banking standards
Structuring the financial reporting on the 7 base of trading Law for private companies
8 Government’s intervention reduction
496
18- Evaluate the conformity of private banking of Iran with the current country’s potentialities and international banking standards.
Very No. Subject/Condition Very Moderate Little None Much
Enjoying stability in government’s economic 1 decisions and policies
2 Independent observation of Central Bank
3 Improved banking laws and regulations
4 Competitive condition in banking industry
Competition in Capital market through 5 diversification
Enjoying related infrastructure of e-banking 6 expansion
7 Foreign owners
8 Expansion of banking operation abroad
9 Expansion of investment abroad
Tendency of credible international institutes for 10 ranking the banks
Presence of credible international auditors and 11 consultants in banking affairs
497
Conditions of Success for Private and Privatized Banks in Iran
Objective: Identifying the problems and their causes for providing some solver methods.
19- Evaluate the positive impact of the followings on performance improvement of private banks. Very No. Condition Description Very Moderate Little None Much
1 Competition opportunity
2 Free activation of social fundamental institutions
3 Presence of foreign banks
4 Independency of Central Bank
Eliminate the 5% ownership restriction for private 5 sector
6 E-banking Expansion
7 Increasing the number of small private banks
8 Merging small private banks
Establishing more private banks by semi- 9 governments institutes
Participation of foreign investors in shareholders 10 combination
498
19-1- If your evaluation for elimination of 5% ownership restriction for private sector is not “Very Much” or “Very”, explain your reasoning.
………………………………………………………………………………………………… ………………………………………………………………………………………………… …………………………………………………………………………………………………
19-2- If your evaluation for foreign investors participation is “Very Much” or “Very”, evaluate the impact of the followings as the barriers in attracting the foreign investors in banking ownership of Iran.
Very No. Barrier Very Moderate Little None Much
1 Legal barriers
2 Unstable security in the region
3 Political conditions in Iran
Unstable economic decision makings 4 by government
5 Investment insecurity in Iran
Authority of “Vali-e Faghih” in the 6 matter of property right
20- How the change in the present shareholders combination of privatized banks (towards more ceding to the private sector) will positively impacts the banks performance?
Very much Very Moderately Little None
499
If your answer is “Little” or “None”, explain your reasoning.
………………………………………………………………………………………………… ………………………………………………………………………………………………… …………………………………………………………………………………………………...
21- Evaluate the following methods as a solution for transferring the management control of privatized banks to the private sector with change in the existed ownership structure.
Suitable Suitable No. Method Description Inappropriate For 3 years for 5 years
Continuation of present situation with 1 distributing the Justice Shares to the individuals
Management contract with domestic 2 private sector
Management contract with foreign private 3 sector
Management contract with a combined 4 group of private banks
5 Any other:
500
22- Evaluate the effectiveness of following proposals in performance improvement of privatized banks.
Very No. Method Description Very Moderate Little None Much
Ceding of 20% government’s share to the 1 private sector
Distributing the Justice shares to the 2 individuals
Restricting the total ownership of semi- 3 government institutes in each bank to 10%
Foreign investors ownership up to the 4 permissible level of management control
5 Any other
501
23- Evaluate each of the following methods to reduce the ownership portion of semi- government institutes in privatized banks by assuming the provided legal execution possibility for each of the proposed method.
Best No. Method Description Unsuitable Suitable Solution
Reselling the shares of semi-government 1 institutes at once in TSE
Gradual reselling the shares of semi-government 2 institutes in TSE
Negotiation with domestic investors to ceding 3 the shares of semi-government institutes
Coincident negotiation with foreign and 4 domestic investors to ceding the shares of semi- government institutes
5 Any other
24- Do you know any solution or method be implemented by the end of the Fifth Economic Developing Plan to involve the Justice Shares owners in related functions of any privatized SOBs shareholders? Yes No
If the answer is “Yes” please briefly describe your proposal:
………………………………………………………………………………………………… ………………………………………………………………………………………………… …………………………………………………………………………………………………
502
25- Evaluate the followings as a solution for reducing the amount of Justice Shares in the ownership combination of privatized banks with considering the benefits of the Justice Shares owners: Best No. Method Description Unsuitable Suitable Solution
Encouraging the private sector to establish Public Shares 1 Investment Co. and offering at once all the Justice Shares through TSE
Establishment of Financial Specialized Investment 2 Co./Bank (public shares) and offering the Justice Shares portion of privatized banks
Selling the Justice Shares portion of privatized banks to 3 the qualified private sectors through negotiation and bidding in TSE
Providing a fund by private banks and selling at once all 4 the Justice Shares portion of privatized SOBs to this fund
5 Any other:
26- Do you know any solution for ceding the remaining shares of privatized banks (including all the shares controlled by the government) to achieve the real successful private bank condition? Yes No
If the answer is “Yes” please describe your proposal/s.
………………………………………………………………………………………………… ………………………………………………………………………………………………… …………………………………………………………………………………………………
503
27- Evaluate the following proposed methods for ceding the remaining shares of the four privatized banks.
One of No. Method Description unsuitable Suitable the best Solution
1 Continuation of the executed method
New SIP through capital increase and divesting the 2 participation right of present owners
Selling to the qualified private sectors through 3 negotiation and bidding in TSE
Providing necessary conditions to attract foreign 4 investors
Excluding the privatized SOBs from Justice Shares 5 distribution
504