Semi-Governmental Institutions in Iran: An Analysis | PART 1

The Problem of a Structural Lack of Transparency and Unaccountability

Introduction and Background

In this article, we delve into the often-discussed but rarely fully explained category of semi-governmental institutions: organizations and companies in Iran with a primarily economic and financial function. We will explore their origins and links to widespread economic and political corruption in the country. First, we will provide some background information on how these institutions came into existence and the factors that have contributed to their growth over time. Then, we will examine their structure and impact on economic and political corruption within Iran. All the while, we will establish how the establishment of these entities allowed the Islamic Republic of Iran to exert state control over seminal financial resources, without obligating itself to the accountability and transparency that is associated with officially state-owned entities. 

During its initial decade, Iran's economic policy was predominantly state-centred. However, in the 1990s the Iranian establishment actively embraced policies advocated by the World Bank and the International Monetary Fund (IMF) and began moving toward pro-market strategies. While discussing the reasons for this shift and detailing the transformation process are beyond the scope of this report, it is worth highlighting that this policy change led the core establishment of the Islamic Republic of Iran (IRI) reversing the process of integrating private institutions into a state-centred economy¹ and, eventually, returning them to the ‘private’ sector.² 

Irrespective of whether privatization is a viable or preferable option, especially in an essentially rent-based economy like Iran³, the promised privatization did not occur. Instead, many central economic, financial and industrial institutions were transformed into a hybrid form that combined some characteristics of state-controlled (governmental) institutions, including their ownership and sources of funding, whereas their lack of public accountability resembled that of private entities. This hybridity was designed to benefit the IRI's political elite, ensuring maximum access to resources with minimal or no liability. This resulted in the creation of financial, industrial, and business entities with opaque structures and undisclosed financial records. One of the most detrimental consequences of this ‘pretence’ of privatization is the increased influence of ‘tutelary institutions’, particularly the institution of the Supreme Leader, and an array of institutions under his sway.⁴

What are Semi-State (Priva-governmental) Institutions/organizations/companies? Why are they Significant?

The term ‘semi-governmental’ (Shebhe-Dolati in Farsi) or its less formal equivalent, ‘Privamental’ (a combination of ‘private’ and ‘governmental’, Kohsoulati in Farsi), is an unofficial term used to describe a range of primarily financial institutions, companies and businesses. However, although they are often grouped together in public discourse, these institutions vary both legally and structurally.

There are essentially two sub-categories. The first consists of institutions formally designated as ‘Non-Governmental Public Institutions’ (NGPIs)⁵, which in public discourse are sometimes referred to as semi-state institutions. These entities were initially recognized in the General Accounting Law of 1987 and further defined in the ‘Law of the List of Non-Governmental Public Institutions’ of 1994, in alignment with the state's ‘pro-privatization’ initiatives.⁶ Most of these entities are directly or indirectly related to ‘tutelary institutions’, such as the non-elective institutions that are often associated with the Supreme Leader, with Bonyads being a common example.⁷ As discussed in our 2022 Transparency Lab report, ‘Transparency, Corruption, and Accountability in Iran’, there is a significant lack of legal clarity regarding these institutions' institutional, administrative, and financial aspects, and their level of monitorability and accountability varies from very low to non-existent, depending on the specific case.

A second layer of complexity was added to these already problematic entities, starting in the early 2000s (1380s in Iran's Solar Hijri calendar). This was a response to newly imposed sanctions due to the IRI's nuclear program and a reinterpretation of Article 44 of Iran's constitution, which aimed at releasing officially state-owned entities into the ‘private’ sector controlled by the state elite. This served the state elite's desire to plunder natural and economic resources further for personal and factional political gain.⁸

Two significant developments occurred during this period: 

These were then acquired by state actors, often by unaccountable entities like NGPIs (Bonyads, etc.). As Amir Ghadimi notes, such institutions can have ‘extrajudicial’ power and utilize their financial power to acquire public companies that are supposed to be ‘privatized’.⁹ According to the Iranian Majles's estimations, only 16 percent of the transferred state assets were allocated to the 'genuine' private sector. Some estimates are even less optimistic, putting the number as low as 5 percent. Abbas Akhundi, a former minister of Roads and Urban Development during the Rouhani period, estimates that over 100 billion dollars of Iran's public wealth were transferred outside of official state control during the 2000s, with most of it ending up in these unaccountable ‘priva-governmental’ entities.

The creation of these entities was shrouded in secrecy, and they often operated within Iran's unofficial grey and black-market economy, engaging in money laundering and other activities associated with circumventing sanctions, including the financial activities of Iran's paramilitary organizations.

While these companies are organically linked to their respective NGPs and to military organizations such as the Islamic Revolutionary Guard Corps (IRGC), the absence of laws governing them made them a more viable option for the state elite to limit public access to their organizational and financial information. It is essential to note that the motivation for circumventing sanctions only accelerated a process that had already begun within the IRI, driven by various factions within the Islamist forces seeking to monopolize resources.¹⁰

Setting aside motivations and historical context, the result of this process of reconfiguring and creating numerous industrial and financial units, i.e., companies, is that as of 2015, the Securities and Exchange Organization of Iran (SEO) estimated that there were over 190,000 units. This number has likely increased since then.

Consequently, a significant proportion of powerful, essential, and economically valuable institutions in Iran are indirectly owned by state-related institutions and are only nominally non-governmental. For instance, the Mostazafan Foundation (Bonyad e Mostazafan) alone has an estimated 12 holdings and a further 175 economic companies.¹¹

Various concerns about the many problematic aspects of these entities have been raised, not only by civil society actors but also by various state officials, especially during periods of heightened factional struggle within the state elite. According to Majid-Reza Hariri, the Vice President of the Iran-China Chamber of Commerce, these entities are essentially state institutions, minus any oversight or inspection.¹² They resemble private institutions in structure and also from a legal perspective, but all their managers and CEOs are appointed by the state, above all by the tutelary and Supreme Leader-led organizations. Hariri asserts that these entities have become more powerful than their private, state-run, or cooperative counterparts.

Abbas Akhoundi, the Minister of Roads and Urban Development during Rouhani's presidency, goes further, asserting that this situation is akin to auctioning off national assets and forming a shadow government that is unresponsive to regulatory bodies and contributes to the inefficiency of Iran's economy.

While many of these organizations were established in the 2000s, public interest in them grew in the mid-2010s, particularly with the scandal surrounding the 'astronomical salaries of directors of quasi-governmental companies.' Simultaneously, it was revealed that these organizations/companies collectively enjoyed an annual tax relief to the tune of 20 billion dollars. Although officials made promises to rectify this and to compel these entities to pay taxe, these promises went unfulfilled, partly due to a lack of genuine intent and partly due to the impossibility of taxing these entities owing to the lack of financial information related to them.

This article has explained what semi-state institutions are and why they are of such significance. It has also demonstrated how they are ‘essential’ in maintaining and facilitating networks of state-related corruption in the IRI. in the second part of the article, we will focus on the legal framework that pertains to these institutions and offer potential short and longer-term solutions that could help mitigate their negative impact on economic and political corruption in the country. 

Footnotes

1.  The process of taking over private industrial and financial institutions had taken place after the establishment of the IRI and during its early years.

2. In order to lay the legal basis for this, the 44th article of Iran’s 1979 constitution had to be reformulated.

3.  On Iran as a rentier state see: Mahdavy, Hossein (1970). ‘Patterns and Problems of Economic Development in Rentier States: the Case of Iran’, in M. A. Cook (ed.). Studies in the Economic History of the Middle East (1 ed.). London: Routledge. pp. 428–467. Amongst others. 

4.  We have discussed different type of state institutions in the IRI in our 2022 report titled ‘Transparency, Corruption, and Accountability in Iran’, at length. For more info see: https://www.tlabproject.org/report (English) and: https://www.tlabproject.org/report-fa (Farsi).

5. نهادهای عمومی غیردولتی In Farsi 

6.  قانون فهرست نهادهای عمومی غیر دولتی ۱۳۷۳ In Farsi

7.  Some significant examples include: Mostazafan Foundation of the Islamic Revolution (Bonyad e Mostazafan), Iranian Red Crescent Society, Imam Relief Committee (Komiteye Emam), Foundation of the Martyrs of the Islamic Revolution. (Bonyad e Shahid), Foundation of the Islamic Revolution Housing (bonyad e Maskan), 15th of Khordad Foundation (Bonyad e 15 Khordad), Islamic Propagation Organization (Sazman e Tablighat e Eslami) amongst others.

8.  For a detailed review of Political Economy of Predation including in the IRI see: Vahabi,Mehrdad, 2015. "The Political Economy of Predation," Cambridge Books, Cambridge University Press. 

9. This has also been confirmed by Tlab’s sources in Iran.

10.  This can be traced prior to the beginning of the ‘privatization’ process and all the way back to the foundational years of the IRI. A significant moment in this regard became evident during the drafting process of the 1979 constitution, with Khomeini insisting that resources deemed as ‘ownerless’ by their interpretation in Islamic jurisprudence (which include confiscated properties and to natural resources such as rivers and forests) should be exclusively and privately owned by the Supreme Leader. This view that is echoed in article 45 of the Iranian constitution.

11. it is important to note that Bonyad e Mostazafan is only one of the mid-range stakeholders in the semi-governmental companies’ game.

12.  Meaning: they are exempt from the usual inspection that state-institutions are subject to.