iran’s commanding heights: conglomerate ownership in the islamic republic

Iran’s Commanding Heights: Conglomerate Ownership in the Islamic

Republic

Kevan HarrisUCLA ERF Forum on Private Sector

December 22, 2016

Outline Who owns Iran? Why does it matter?

Growth of the parastatal sector

Analyzing the Tehran Stock Exchange

The Conglomerate Form as Organizational Strategy

Who Owns Iran?

Bonyad Mostazafan Cooperative Foundation of

Islamic Revolutionary Guards Corps

Investment Fund of Leader’s Office

Who Owns Iran?

Social Security OrganizationInvestment Corporation Bank Pasargard

Rural and NomadInsurance Fund

Growth of the Parastatal Sector

1980s-1990s: Nationalization after 1979 revolution Postwar (1990s) conglomeration of

state-owned enterprises (push for public self-sufficiency)

Tepid privatization of public sector Private economic resurgence alongside

existing SOEs as downstream subcontractors

Growth of the Parastatal Sector

2000s: SOEs and semi-public companies extend

investments horizontally into financial speculation and cross-sectoral holdings

Government prioritizes the selling of shares of major SOEs as key economic plan

All political factions emphasized privatization of public sector as key to growth

Growth of the Parastatal Sector

Three types of SOE transfers (2005-2013): Stock market auctions and consignments Justice Shares – “popular” shares of ~60 companies organized

through provincial investment firms Government transfer in lieu of debt

80-90% of $80 billion USD in SOE transfers went to parastatal / semi-public / quasi-governmental sector

Legal category for privatization to parastatals in Iran: public non-governmental sector (نخش عمومی غیر دولتی)

Each has major social/political constituency and political factional support – no single dominant faction in Iranian politics

Growth of the Parastatal Sector

Contractor firms, banks, cooperatives, credit associations, and investment companies connected to five types of para-statal organizations: Military Institutions (IRGC, Basij, Armed Forces) Provincial Investment Companies Welfare and Retirement Funds (e.g., Social Security, Army,

Civil Service, Rural and Nomad) Revolutionary Foundations (e.g., Mostazafan bonyad) Religious Endowments (e.g., Imam Reza Shrine)

Source: Iranian Chamber of Commerce, Industry, and Mining, Study of Participation of Sectors of the Economic System in the Privatization Process in Iran from 1380-1390 (Tehran: Center of Cultural Affairs and Publishing, 2012)

Growth of the Parastatal Sector

Parastatals developed along similar organizational lines, no matter the ownership type

▪ Founded a major bank or linked to state bank

▪ Expanded into high growth sectors: real estate and finance, construction, transportation and services

Analyzing the Tehran Stock Exchange

Tehran Stock Exchange data from 2013/14 300+ companies Institutional investors

listed with 1%+ ownership

Coding for political linkage and concentration

Data limitations: not all listed firms have data, not all large firms are listed

Additional large non-TSE firms added

Top 500 companies in Iran ranked by quintile market share for Persian year 1392 (2013/14)

Two Largest Pharmaceutical Firms

Company % shares Investment Firm Group Linkage Coded42.31 Sobhan Pharmceutical Group Imam's Office Parastatal23.12 Sobhan Darou Pharmaceutical Company Imam's Office Parastatal

6.2 15th Khordad Bonyad Bonyad Parastatal5.7 Saipa Investment Group SAIPA Public3.41 Maskan Investment Group Bank Maskan Public

3.1Rural and Nomad Social Insurance Investment

Group SSO Pension2.28 Alborz Investment Co. Imam's Office Parastatal1.4 Sina Bank Bonyad Parastatal

1.09 Oil Company Retirement Fund Oil Ministry Pension

1.09 Pars Aryan Investment Group unk -

AlborzPharma

Co.

Two Largest Pharmaceutical Firms

Company

% shares Investment Firm Group Linkage Coded

72.05 Social Security Investment Company SSO Pension

6.27 Saba Tamin SSO Pension

4.22 Saba Investment Management Co. SSO Pension

3.79 Refah Bank SSO Pension

2.84 Tejarat MehranPrivate Investment

Co. Private

1.03 IDIC IDRO Public

1.03 Turqouise Partners Limited Private Mutual Fund Private

TaminPharma

Co.

Two Largest Auto Firms

Company % shares Investment Firm Group Linkage Coded

9.87 Tadbir Imam's Office Parastatal9.71 Samand Iran Khodro Public7.93 IDRO IDRO Public7.63 Unknown - -5.6 Gostar Borna ? -4.67 Negar Nasr Basij Parastatal4.36 IDRO IDRO Public3.65 NICI NICI Public3.35 Civil Servants Pension Fund Pension Pension2.99 Kish Sphere Iran Khodro Public2.16 Mellat Bank Semi-public Bank Public2.1 SSIC SSO Pension2.06 Industry and Mine Investment Co. IMIDRO Public1.63 Saba Tamin SSO Pension1.52 IPO proxy IPO Public1.17 IDRO IDRO Public1.08 Mellat Bank Semi-public Bank Public

1 Ternian Iran Khodro Public

Iran KhodroAuto

Two Largest Auto Firms

SAIPA

Company

% shares Investment Firm Group Linkage Coded

12.85 IDRO IDRO Public9.98 SEMICO Pension Pension6.72 Rena Semi-public Cong Public6.57 Radin SAIPA Public5.03 Rena Semi-public Cong Public4.8 IPO proxy IPO Public4.8 IPO proxy IPO Public4.08 IPO proxy IPO Public3.04 Bank of Investment and Mine Public Bank Public2.85 SAIPA Investment Group SAIPA Public2.76 Bank of Investment and Mine Public Bank Public2.68 SSIC SSO Pension2.04 SEMICO Govt Pension Pension1.93 SSIC SSO Pension1.9 NICI NICI Public1.72 Puya Hamgan ? -1.09 Mosktarak Toseh Bazar Iran ? -

Analyzing the Tehran Stock Exchange

Market concentration varies by sector Some sectors have lower barriers to entry for parastatal

and private capital

No single dominant category of ownership over top companies across sectors Most common is still public ownership

Main form of ownership is through conglomerate / holding company “amalgamation of legally-independent companies through

various formal and informal ties” (Colli and Colpan 2015)

Conglomerates in Iran

Ghadir Investment Company -- formerly owned by Export Bank, now majority owned by several pension funds

Conglomerates in Iran

Imam Reza Shrine (Astan Qods Razavi)a parastatal foundation based in Mashhad

Conglomerates in Iran

Social Security Investment Company—a pension-owned conglomerate

Conglomerates in Iran

Bonyad Mostazafan as Diversified Holding Company

The Conglomerate Form Example: Bonyad Mostazafan

150 firms 23 listed on TSE BM subsidiaries in 2014 produced $4.64 billion

USD in revenues (1.1% of GDP) Overall profit of 93 subsidiaries increased from

2006 to 2014 Estimate of profits in 2014: $1.36 billion USD New investments into mining, energy, services,

construction, sea transport Uses “management speak” but is opaque to state

The Conglomerate Form How many parastatal firms?

Estimate of Iranian Securities and Exchange Commission: 20,000 firms (summer 2016)

# of firms that have not disclosed any financial information to government: 19,000 firms

Rouhani govt efforts at enforcement?▪ Taking back shares of Telecom Iran from Etemad

Mobin▪ Rescinding ownership of MAPNA services from

Imam Reza Shrine

The Diversified Business Group

The Conglomerate Form Cases across the

world

Family and state capitalism does not diminish through liberalization

Difficult to explain with theories of lowering transaction costs

Publications & contact:kevanharris.com

kevanharris@soc.ucla.edu