A review on govt. plan to barter oil for dues to private sector

Based on this draft, nearly 400 trillion rials (about $9.52 billion) worth of oil is going to be given to the private companies in return for the electricity that they have provided for the national network, or for the services that the contractors provided for the energy ministry.

According to the energy ministry, big companies and well-established contractors have given green light to such a mechanism in order to settle their dues.

Although this mechanism has been mentioned and foreseen in the budget law, and the government’s efforts for paying its dues to the private sector, in itself, is a positive act which must be appreciated, but there is still uncertainty about the practicality of this approach. 

Is this method really suitable for solving the financial problems that the government is facing regarding the private sector and the electricity industry? And if yes, what would the scale of such bartering system be? Would it cover small amounts as well?

Govt. payment mechanisms

So far, the Iranian government have tried numerous approaches and mechanisms for settling its debts to the private sector, in times that the financial conditions are not right for clearing payments with money (like during sanctions and recession).

Bartering the dues for “treasury bills” was one of the first approaches that the government used in order to pay its dues to the electricity contractors and private power plant owners. In this method, the energy ministry would pay it dues in the form of a treasury bill which can be traded for raw materials like aluminum ingots, steel and etc. needed by the companies and contractors.

Another mechanism was using “clearing bills”, in this method the government would offset its debts to the companies and contactors with the taxes and legal bills which they were supposed to pay to the government in order to operate.

Many experts and analysts believe that such approaches are suffering from significant shortcomings and loopholes. For instance, in many cases, the value of the government’s treasury bills could decrease drastically at the time that the company or contractor wants to use them, or the manufacturers and companies doesn’t supply the data-x-items covered in the bills, so many of the owners of such bills will be forced to sell them to middlemen in the market for lower prices in order to use the money with more flexibility.

The new approach

Analysts and experts in the country’s power industry believe that, like many other methods which have been implemented so far, the oil-for-due mechanism has its own shortcomings and drawbacks.

They argue that this mechanism only good for big companies and contractors with large amounts of due payments, and the small and medium-sized companies and enterprises would not benefit much from such bartering system.

The ministry of energy has said that this method is intended to settle state debts to large contractors. This means that the government itself believes that the developed method works only for large contractors or large companies. But, it should be noted that the number of big contractors which have the means to receive, transport and sell oil in or outside the country is not that much and many of the companies, active in the energy industry are small and medium-sized companies.

This suggests that the target population which the government has considered for this mechanism is not that rational and the statistical pool considered for this method is very limited and small.

It is also said that since this new mechanism requires the coordination between two different miniseries, namely energy ministry and the oil ministry, inevitability some unforeseen issues might emerge in the process.

Final thoughts

Many of the experts and scholars in the country’s energy industry believe that if the energy ministry wants to take measures to address its debts to the private sector, it should find a comprehensive and inclusive solution, one that covers the whole industry, since as I mentioned before only a limited number of companies in the country have the ability or means to use oil as a payment method.

The best way to address the financial issues which the energy ministry is facing is to remove the subsidies which is applied for the electricity bills for households and commercial consumers.

There is a huge gap between the real value of electricity and the price with which it is provided to the consumers in Iran. Closing this gap (only if partially) would solve many of the financial problems that this industry is currently facing.

Emending the power industry’s economy requires emendation in the country’s economic structure at a macro level, but unfortunately there doesn’t seem to be any will for going in that direction anytime soon.