Iranian President Hassan Rouhani has appointed Safdar Hosseini, a former minister of economy in the Mohammad Khatami administration, as the new managing director of the National Development Fund (NDF). This appointment was welcomed by members of parliament that insist on reducing the government’s control over the fund and returning this important institution to its original mission: to translate Iran’s underground wealth to over-ground investments. The change of guards has also led to a debate about the fund’s performance since its inception.
The rethinking process on how to manage Iran’s oil-export revenues started more than a decade ago. The new approach was initiated in the early 2000s by former President Mohammad Khatami, who introduced the Oil Stabilization Fund (OSF) as a mechanism to compel the government not to allocate all oil-export revenues to current expenditure. In the new system, only a budgeted amount of oil revenues would flow into the treasury with the surplus allocated to the OSF for strategic investments to spur economic growth, including loans to the private sector. In July 2005, when Khatami passed on the government to his successor, Mahmoud Ahmadinejad, the OSF had a balance of $14 billion. However, the Ahmadinejad government, which came to an end this year, managed to misappropriate the OSF by utilizing its resources for ongoing government expenditure, especially in financing the shortfalls of the subsidy reforms it initiated in 2010. In early 2011, the Iranian media reported that the OSF balance stood at zero, a statement that was later confirmed indirectly by government officials.
In order to lock away some of the excess funds, in March 2011 (coinciding with the commencement of the its fifth Five-Year Plan), Iran introduced the NDF. It was decided that a minimum of 20% of the country’s oil- and gas-export revenues would be injected into this fund, which would only be available for long-term capital investments (especially strategic and hi-tech investments). According to the state entity that manages the NDF, the fund “aims to turn some of the country's revenue earned by selling oil, gas, condensate and oil products to durable wealth, productivity, economic incentive and capital. The NDF also aims to preserve the share of oil and gas resources and products for future generations.” The original statutes of the NDF further obliged the fund to only extend loan facilities to private or cooperative entities. Companies in which the government has more than 20% ownership are considered governmental, making any entity with 20% or less government control private.
In order to reduce the government’s direct control over the NDF, the fund was entrusted to a board of trustees that includes the following nine officials: president (chairman of the board), vice president in charge of strategic oversight (secretary of the board); representative of the Majles Economic Commission; representative of the Majles Plan and Budget Commission; chief attorney general; minister of finance and economic affairs; minister of cooperatives, labor and social affairs; minister of petroleum and the president of the Iran Chamber of Commerce. It was hoped that despite the heavy footprint of the government, the board could exert some oversight over investment decisions. However, according to Mousavi Largani, one of the Majles representatives in the board, in the previous government, there were no regular board meetings and the fund’s management (appointed by Ahmadinejad) was fully in charge. This meant that the fund ended up being controlled by the Ahmadinejad administration.
Also, the process of approving applicants had many flaws. In fact, the allocation of funds to loan applicants has been based on an initial evaluation of applications by the NDF’s corresponding banks (which totaled 18, including the majority of leading state and private banks). Once the relevant bank approves the feasibility of a project, a loan agreement is signed with the project owner. In a country like Iran, such a system paves the way for favoritism and misappropriation of funds.
Based on the latest official reports, the NDF has received a total of $54.6 billion in its two years of existence. While the official report indicates that a total of $23.4 billion work of loans have been extended, according to Gholamreza Zardoshti, deputy director of NDF in charge of loan facilities, the total amount of loan agreements has reached $34.7 billion. Furthermore, according to Zardoshti, 20 rial-based loan agreements have been signed with a total value of 105,000 billion rials ($4.2 billion at the current official rate). Incidentally, the NDF's initial idea was to only issue hard-currency loans with an annual interest rate of 5% for deprived regions and strategic sectors and 6% for other applicants. The fact that the rial-based loans have been issued with an annual interest rate of 13% is a first sign that the fund has been used for purposes outside its actual mission. It is such discrepancies that undermine the credibility of the officials who are in charge of running this important institution. In fact, the NDF could be a crucial tool in reviving the Iranian economy, especially in creating needed jobs.
The official report claims that 367 projects have received loans (67% in hard currency and the rest in rials) and that some 82,000 jobs have been created through these investments. However, even these statistics are troubling. Various studies have indicated that the creation of one sustainable job in the Iranian economy would require an investment of $10,000. Even in Iran's capital-intensive industries, the capital-labor ratio could not be higher than $50,000 on average. Considering that according to the report, 92% of the funds were allocated to industrial and mining projects (including oil, gas and petrochemicals), we can calculate the potential economic impact of the investment based on capital-intensive industries. This would mean that an investment of $23 billion should have generated a minimum of 460,000 jobs. The ridiculously low number of jobs actually created suggests that the resources were not used appropriately.
It is also a fact that many private-sector applicants who have presented valid projects to the NDF have not received any loans in the past two years. All of the above facts suggest that the NDF has mainly been at the disposal of the previous government and its immediate networks. In reality, the NDF had become a main source of funding for capital investments by large Iranian enterprises (including petroleum companies that are still mainly governmental) and by provincial administrations. In other words, the NDF has been filling the financial gap left by the government and the country’s banking system.
It is now up to the new government, especially Hosseini, to return the NDF to a meaningful role in the Iranian economy. Its performance to date has been dismal and opaque, and leaning toward the public sector. Now that the president of the Iran Chamber of Commerce, Mohammad Nahavandian, has become the chief of staff in the government, one could be hopeful that there will be more attention paid to how this fund could be used more efficiently. What is needed is an orientation toward strategic capital investments that will create jobs, fuel technological progress and promote Iranian exports.
Bijan Khajehpour is a managing partner at Atieh International, the Vienna-based international arm of the Atieh Group of Companies, a group of strategic consulting firms based in Tehran, Iran.