VZCZCXRO6077
PP RUEHBC RUEHDE RUEHKUK
DE RUEHDIR #0011/01 0741029
ZNY CCCCC ZZH
P 151029Z MAR 07
FM IRAN RPO DUBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 0068
INFO RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RUCNIRA/IRAN COLLECTIVE
RUEHDE/AMCONSUL DUBAI PRIORITY 0063
RUEHAD/AMEMBASSY ABU DHABI PRIORITY 0036
RHEHAAA/NSC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHDIR/IRAN RPO DUBAI 0061

C O N F I D E N T I A L SECTION 01 OF 02 IRAN RPO DUBAI 000011 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL:  3/15/2017 
TAGS: ECON ECIN PGOV IR
SUBJECT: PRIVITIZATION DEBATE SHARPENS FACTIONAL RIVALRY 
 
 
RPO DUBAI 00000011  001.2 OF 002 
 
 
CLASSIFIED BY: Jillian Burns, Director, Iran Regional Presence 
Office - Dubai, Department of State. 
REASON: 1.4 (d) 
 
1.(C) Summary. Privatization of state-owned enterprises has been 
a notional objective of the Iranian government since it 
implemented its first 5-year economic plan in 1989.  Two 
significant barriers to privatization have been the strict 
interpretation of Article 44 of the Constitution by the Iranian 
government, and private sector anxiety about uncertain outcomes 
of privatization.  In July 2006, the Supreme Leader issued a 
decree redefining Article 44 and thereby opening up most 
government industries to privatization.  Despite the decree, 
little concrete action to advance privatization efforts 
followed.  In a speech to state officials on February 19, 
Ayatollah Khamenei criticized the lack of progress on the 
privatization front and, according to one economist, openly 
contradicted key aspects of the president's position on 
privatization.  Several contacts predict that IRGC 
controlled-companies will take over the privatized companies and 
"real" economic growth will only result from creation of new 
private enterprises.  End Summary. 
 
Privatization efforts 1989-2006 
-------------------------------------- 
 
2.(C) Privatization has been an agenda item for the Iranian 
government since its first post-revolutionary economic 
development plan in 1989.  However, progress has been 
negligible.  An Iranian economist, speaking to IRPoff, 
attributed the lack of privatization initiatives to two factors. 
 Firstly, a strict interpretation up until 2006 of Article 44 of 
the Iranian Constitution limited the private sector role in the 
economy and called for government control of major industries. 
(Note:  Article 44 divides the Iranian economy into three 
sectors - state, cooperative, and private - and it outlines the 
size and role of each sector.  Endnote)  Secondly, there has 
been no push from the private sector because of overall 
pessimism that privatization would be conducted in a fair, 
transparent manner.  This pessimism, according to the economist, 
is compounded by the private sector's inability to help shape 
government policies. 
 
The Supreme Leader's decree 
------------------------------------ 
 
3.(C) On July 2, 2006, the Supreme Leader issued an executive 
order which in effect reinterpreted Article 44 of the 
Constitution and opened up "most" government sectors to 
privatization.  The economist suggested that the Supreme Leader 
stepped up privatization efforts to stimulate the creation of 
sorely needed employment opportunities and to combat criticism 
that the Islamic Republic is unable to adapt and change. 
Efforts are allegedly underway to make the Chamber of Commerce 
more independent in order to directly address the private 
sector's  lack of political representation.  The economist also 
said that political entities affiliated with the business 
community are on the rise, as well as newspapers devoted to 
private sector interests, such as Sarmayeh and Etemad. 
(Comment: To date, IRPoff has seen no evidence of formalized 
private sector lobbying groups taking root.  Much of the private 
sector's political activity appears to take place informally. 
End comment). 
 
4.(C) The Supreme Leader's executive order interpreting Article 
44 stipulates that up to 80 percent of the shares of "most" 
government companies are to be privatized, via the Tehran Stock 
Exchange.  By March 2010, the government must withdraw fully 
from all sectors where the private sector is active, unless it 
receives permission from the parliament.  Private sector 
participation will be allowed in international trade activities, 
unless a government monopoly exists.  The companies that are up 
for 80 percent privatization include: 
-- all government banks except for the following:  the Central 
Bank, Bank Melli, Bank of Industry and Mines, the Agriculture 
Bank, Bank Maskan, Bank Sepah and the Export Development Bank 
(Note.  Five known banks appear to be up for privatization: 
Bank Mellat, Post Bank of Iran, Bank Refah, Bank Saderat Iran 
and Tejarat Bank.  Endnote) 
-- all insurance companies except for Iranian Central Insurance 
-- all power provision companies except for the main power 
transfer networks 
-- all post and telecommunications companies with the exception 
of the parent telecommunication network, transfer of frequencies 
and exchange and distribution of basic mail services. 
-- all government aviation and shipping organizations, except 
for the Civil Aviation Organization and the Ports and Shipping 
 
RPO DUBAI 00000011  002.2 OF 002 
 
 
Organization 
-- all downstream oil and gas companies 
-- all other government companies, except for companies where 
the government has a monopoly (such as the Iran Tobacco 
Corporation) and companies that have regulatory functions (such 
as Data Services of Iran). 
 
Recent privatization efforts 
------------------------------- 
 
5.(C) In an address to public officials February 19, Ayatollah 
Khamenei indicated that necessary steps to privatize much of 
Iran's economy have not taken place at a satisfactory pace. 
Khamenei reportedly attributed the delay to a divergence in 
government opinions but made it clear that all policymaking 
should be in line with his July 2006 decree.  The economist 
viewed the fact that Khamenei's speech came two days prior to 
elections for the Iran Chamber of Commerce, Industry and Mines 
(ICCIM) as an indication that many of "the top leadership is 
ready for a new era of interaction with the private sector." 
Reportedly for the first time, reformists claimed the majority 
of seats in the ICCIM in the February elections.  (Note: The 
ICCIM has 40 private sector representatives and 20 government 
representatives.  Endnote.) 
 
6.(C) The economist noted that the government divergence of 
opinion referred to by Khamenei is a clash between two distinct 
groups:  1) those who believe in a 'Chinese style' economic 
opening which would unleash new economic momentum through 
private sector investments; and 2) those who want to control all 
economic activity by passing on economic interests to trusted 
circles rather than to the real private sector.  He claimed 
Khamenei and Rafsanjani fall into the first camp, but 
Ahmadinejad and his supporters - who constitutionally control 
domestic economic policy - fall into the latter group.  The 
analyst underscored that Ahmadinejad's priority coming into 
office was redistribution of wealth, not creation of new 
economic growth.  He claimed that Khamenei sent a shot across 
the bow of the president's camp with his statement February 19 
that private sector investors are entitled to suitable profits. 
This runs contrary to Ahmadinejad's reportedly populous 
approach.  The President, noted one businessman, favors 
redistribution of 40 percent of private companies to the lower 
class (known as justice shares) and turning over 40 percent to 
IRGC cronies. 
 
7.(C) Several business contacts have noted that they "expect" 
that "privatization" will actually be an opaque process in which 
state-run companies will be handed over to former IRGC members. 
The only "real" area for growth, noted one expert, is organic 
growth of small-to-mid-size entities.  Contacts typically note 
that although setting up a business can be a cumbersome process 
in Iran, individuals can make a comfortable living as long as 
their business does not grow "too much."  Presumably, because 
growth beyond a certain level turns businesses into prey for 
rapacious public officials. 
 
8.(C) Comment.  The move toward privatization and a market 
driven economy could represent a significant change in Iranian 
economic policy, if properly enacted.  However, if as suspected, 
sectors of the economy that are "privatized" are only 
transferred from direct government control to the control of 
government-affiliated entities, little positive economic impact 
is expected.  It's safe to assume that we will see growth in 
semi-private institutions.   Consequently, it is likely that in 
the short-tem the government's efforts will result in 
privatization in name but not substance.  At this key juncture, 
if we conclude that privatization of Iran's major industries and 
services will create a more open, stable, economy and that such 
a development could help advance US interests, we should explore 
means of influencing this internal debate in this direction. 
Public Diplomacy and civil society programming through MEPI and 
DRL are possible vehicles. 
BURNS