By Daniel Fineren
In late 2010, Mahmoud Ahmadinejad’s government began slashing subsidies on a range of fuels in order to reduce demand and costly fuel imports. It softened the blow by setting up a system of cash payments to return some of the money to Iranian householders.
The subsidy cuts were successful in rationalising fuel use and reducing waste. But the cash payments evolved into a broad system to help Iranians cope with soaring inflation, according to an International Institute for Sustainable Development study.
Iran’s new oil minister, Bijan Zanganeh, said the National Iranian Gas Company (NIGC) and National Iranian Oil Refining and Distribution Company (NIORDC) are required under the current annual budget to pay 270 trillion rials (about $9 billion) in cash to Iranian citizens as compensation for higher fuel bills.
“We have to sell crude oil in order to be able to deposit the necessary resources into Treasury,” Zanganeh was quoted by oil ministry news service Shana as saying.
“But we cannot afford it,” he said on the sidelines of a conference in Tehran, adding that NIGC and NIORDC would spend all their revenues on the handouts and have nothing left to invest in projects.
U.S. and European trade sanctions designed to pressure Tehran on its disputed nuclear programme have cut its oil exports by more than half from pre-2012 levels, depriving the government of billions of dollars a month in revenue that it needs to finance public spending.
Iran delayed a second wave of reforms planned for mid-2012, partly out of concern that it could prove too painful for a population already suffering a sharp drop in living standards because of sanctions.
Intensifying western pressure has put so much financial strain on the government, however, that it may be forced to take the politically risky move of cutting subsidies again soon.
Senior government officials warned in August that Iran faces a shortfall of one third in this year’s budget of around $68 billion earmarked for March 2013-March 2014.
Zanganeh said in early October the government was preparing another increase in prices to lighten the subsidy burden on the government.
Before the first phase of reform, Iran’s gasoline prices were the second lowest in the world behind Venezuela’s.
Even after the sharp hike in prices, Iranian motorists still paid an average of just $0.33 a litre ($1.25 per gallon) in 2012, compared with a global average of $1.41 per litre, according to World Bank data.
The low fixed prices and the multi-billion dollar cash handouts mean state-run fuel distributors have no funds to invest in new infrastructure, Jafar Qaderi, a senior member of the Iranian parliament’s budgetary committee, was quoted as saying by Shana on Saturday.
“As long as the net costs are not paid to holding companies, they will not be able to implement their development projects,” Qaderi said.
“We have to move towards making the companies self-sufficient to finance their development projects.”
FOREIGN INVESTMENTS
Zanganeh called for a bigger slice of the budget to be channelled towards state-run companies’ oil and gas projects.
Foreign companies that help revive Iran’s energy industry can benefit from Iran’s National Development Fund (NDF), a sovereign wealth fund set up to re-invest money from oil and gas exports, he said.
“State-run companies cannot receive funds from the NDF,” he said. “But based on the policy of supporting the domestic private sector and attraction of foreign investment, NDF resources could be used in highly productive and profitable upstream, downstream and midstream projects.”
Zanganeh said talks had been held with unidentified foreign companies over potential investment in oil and gas projects but that no deals had been reached yet.
In the few months since moderate President Hassan Rouhani came to power, a slight thaw in relations between western governments and Tehran has renewed energy companies interest in Iran.
As long as sanctions remain in place. U.S. and European companies are unlikely to do any deals. Several Asian companies have been talking with Iranian energy officials, even while sanctions make it difficult for them to work in the country. (Reporting by Daniel Fineren; editing by Jane Baird)
