IRAN/ECONOMY: AN IRANIAN NGO REPORT CRITIQUES

C O N F I D E N T I A L SECTION 01 OF 04 ISTANBUL 000367 SIPDIS LONDON FOR MURRAY; BERLIN FOR ROSENSTOCK-STILLER; BAKU FOR MCCRENSKY; ASHGABAT FOR TANGBORN; BAGHDAD FOR MUSTAFA; DUBAI FOR IRPO E.O. 12958: DECL: 09/28/2024 TAGS: ECON PGOV PHUM EFIN PREL IR TU SUBJECT: IRAN/ECONOMY: AN IRANIAN NGO REPORT CRITIQUES IRAN'S BUSINESS CLIMATE REF: ISTANBUL 175 Classified By: Deputy Principal Officer Win Dayton; Reason 1.5 (d). ¶1. (C) Summary: A Turkish NGO (CSR-Turkey) is helping a sister NGO in Iran (CSR-Iran) examine how Iranian businesses implement, and whether the Iranian regime supports, "corporate social responsibility" practices in the workplace. CSR-Turkey has shared CSR-Iran's draft "Iran country report", based on interviews with several GoI Ministries and over 20 companies, trade unions, and industry associations. According to that report, while a handful of Iranian companies implement CSR-type practices (typically large companies with foreign partners and/or who compete in regional markets, such as banks, automotive companies, and oil refineries),most companies do not, because economic conditions are too difficult and the GOI does not require or incentivize such practices. The challenges posed by unemployment, a weak GOI commitment to privatization, endemic corruption, and inconsistent enforcement of labor and workplace safety standards led CSR-Iran to conclude that helping inculcate CSR practices into the Iranian business culture will be a long-term effort, but over time the international business community will act as "an unstoppable force" to compel the Iranian economy eventually to do so. End summary. CSR-Iran's "Country Report on Iran": objectives and participants -------------- -------------- ¶2. (C) We met recently with representatives from the "Corporate Social Responsibility Association of Turkey" (CSR-Turkey, please protect) for an update on reftel efforts to help a sister organization in Iran, the "Corporate Social Responsibility Development Center of Iran" (CSR-Iran, www.csriran.com, please protect) promote CSR principles and practices -- including protecting human and labor rights, supporting the environment, combating corruption, and treating local communities as stakeholders -- with Iranian government and businesses. With CSR-Turkey's help, CSR-Iran looked at 50 Iranian companies in numerous economic sectors, analyzed publicly-available information (including their websites) about those companies, and emailed them a detailed questionnaire to survey their CSR knowledge and practices. CSR-Iran conducted follow-up surveys with the 20 companies that responded. The questionnaire and surveys queried recipients on the degree to which each organization's leadership understands and implements CSR principles in their leadership styles, in the workplace, in the marketplace, and with the local community. In addition to the business sector, CSR-Iran also contacted Iranian government ministries active in the economic sector, as well as NGOs, unions, and industry associations. ¶3. (C) Among the government ministries, public and private companies, and other organizations that participated in CSR-Iran's survey were: -- GOI: The Ministry of Industries and Mines; the Ministry of Work and Social Affairs; the Ministry of Commerce; the Department of the Environment; and the Institute of Standards and Industrial Research of Iran (ISIRI). -- Companies: Iran Khodro, Tam Iran Khodro, Saipa, SAPCO, and Pars Khodro (automotive); Chin Chin Agso, Damavand Mineral Water, Tak Makaron, and BehPaksh (food industries; food distribution),Cobel Darou, Kimidarou, and Kaveh Bandage (pharmaceuticals and medical supplies),Nokia Iran, Pars Online and Avazhang Computers (Telecoms and IT),Pakshoo (detergents),Niru Rail (transportation and shipping); Mashad Carpet (carpets and textiles); Melli Bank Investment Management and Bank Pasargad (banks and financial consulting). -- Other entities and organizations: Iran's Chambers of Commerce, Industry, and Mines (ICCM); the Confederation of Iranian Industry; and the Tehran Stock Exchange (TSE) Initial Conclusions: A few isolated signs of CSR taking root -------------- -------------- ¶4. (C) According to CSR-Iran's draft "Iran country report" (CSR-Turkey will share a hard-copy with ConGen Istanbul when the report is finalized, which we will forward to NEA/IR), Iran's economic and business culture have a long tradition of undertaking activities that benefit the community, including charity for the poor ("zakat") and establishing foundations ISTANBUL 00000367 002 OF 004 ("vaghf") to build local schools and mosques. But more modern concepts such as accounting transparency, modern labor rights, and commitment to environmental protection have been slow to take hold in Iran's largely statist economy. ¶5. (C) CSR-Iran's survey found overall that the larger the company, or the more foreign partners or contacts a company has, or more global a market that the company competes in, the higher likelihood that such a company would be familiar with and willing to implement some CSR principles, even at a short-term cost to profitability. In such cases, company directors do so with the hope that following CSR practices may improve the companies' operational efficiency over the longer-term, while making them more appealing as partners for foreign partners. Their efforts are supported by a small but growing number of domestic NGOs, unions, and industry associations, as well as UNDP's Iran office. Among Iran's publicly-held or controlled companies, CSR-Iran found that only those companies that were active in competitive markets (such as the automotive sector) or enjoyed high financial reserves (such as the hydrocarbon sector) had undertaken any significant CSR-related activities. Several examples of Iranian companies cited in the draft report for implementing CSR practices include: -- Bank Melli, which devotes an unspecified portion of profits to local and national sports teams and to funding cultural exhibits; and Mobarakeh Steel and the Khuzestan Steel Company, which devote unspecified funds to constructing schools, parks, and athletic clubs in local neighborhoods. -- Food companies such as Damavand Water and TAK Makaroon devote 1% of their profits on certain sales to UNICEF projects in Iran, including funding girls, schools in under-developed provinces like Sistan-o-Baluchistan; -- The Tehran Oil Refining Company and the Abadan Oil Refining Company have established independent offices reporting directly to their Boards of Directors which are responsible for assessing and enforcing standards of occupational health and safety for refinery workers, and to monitoring the environmental quality and performance of their refinery operations. -- Automotive companies SAIPA and Iran Khodro have underwritten local community development projects, sponsored scientific and academic conferences (funding Sharif University's robotics competition, for example),and established vocational training centers for employees and their families. But Iran's statist economy is "a hard environment for CSR" -------------- -- ¶6. (C) The number of Iranian companies implementing modern CSR concepts, however, is "frustratingly small", as a CSR-Turkey expert told us. Of the 50 companies that CSR-Iran examined, 37 claimed to pursue at least some activities related to CSR, but in 32 of those cases the CSR activity amounted only to traditional zakat (giving to the poor, a religious obligation). Only eight of the 50 companies pursued other aspects of CSR, according to the draft report, and they tended to pursue such activities that are "local in scope, occasional in nature, and often unrelated to their business strategies." Only one Iranian company had a formal "CSR" strategy. Most companies contacted by CSR-Iran believe that implementing CSR principles and practices are primarily the responsibility of government, not business. Meanwhile, the Iranian government does little to encourage or incentivize such practices, according to CSR-Iran's survey. ¶7. (C) According to CSR-Iran's draft report, among the areas where Iran's economy lags the most, from a CSR perspective are: -- Unemployment: The draft CSR-Iran report concludes that with official unemployment at 18% and unofficially much higher, the current economy "poses a hard environment" in which to persuade beleaguered Iranian companies to invest in CSR practices. A number of respondents acknowledged they were more concerned about cutting costs and saving jobs than spending time or money on the environment or the local community. -- Privatization: Currently Iran's private sector makes up only 15% of Iran's economic activity, according to CSR-Iran. Article 44 of Iran's Constitution, as amended in 2004, calls for the privatization of several largest state-run sectors, ISTANBUL 00000367 003 OF 004 including agriculture, trucking and transportation, construction, and services. Many of CSR-Iran's respondents, however, bemoaned that lack of genuine GoI commitment to privatization. (Comment: Indeed, Iranian press accounts reported that at an early-September meeting, Iranian Chamber of Commerce Chairman Mohammed Nahavandian sharply critiqued the GoI's privatization efforts; he called supposedly public stock offerings of state-run companies a farce, as they only result in other state-run companies or funds purchasing most shares and thus maintaining government control. End comment.) Moreover, even in the private sector there remain obstacles to CSR implementation. For example, even though the Tehran Stock Exchange is putting pressure on TSE-listed companies to accept higher standards of transparency and accountability in the financial reports provided to stock-holders (including a TSE-recommendation for line-item accounting for activities that benefit employees and the local community),this remains a voluntary requirement and most companies ignore it. -- Transparency, accountability, and anti-corruption: According to a CSR-Turkey expert, almost every company that responded to CSR-Iran's survey described corruption as being rampant in that company's sector. Some respondents accused industry competitors of resorting to bribes of GoI officials to gain competitive advantage, while insisting that their own companies would never engage in such illegal practices. A Ministry of Commerce representative told CSR-Iran that the Ministry helped draft a 2008 amendment to Iran's "Guild Systems Law" that prohibits small and medium enterprises (SMEs) in certain sectors, including textiles, transportation, food, and other consumer services, from engaging price-fixing, hoarding, over-charging, or selling smuggled goods. The Ministry, however, acknowledged difficulties in trying to enforce the law uniformly, in part because some of those companies have close, profitable connections to regime insiders. (Comment: A CSR-Turkey expert noted that this Ministry's official's assertion will not appear in the written report, at his request.) Indeed, as the draft report notes, "stakeholder engagement programs are limited to cooperation with the company's key stakeholder, which is usually an influential clergy member, foundation (Bonyad),or state-owned organization" who in turn watch out for that company's interests. -- Labor rights and working conditions: Iran's Institute of Standards and Industrial Research of Iran (ISIRI) last year tried to establish a national "Social Accountability 8000" standard for decent working conditions based on International Labor Organization (ILO) conventions. The effort reportedly received little support from the GoI or key publicly-controlled sectors, and its implementation has stalled. Overall, the CSR-Iran report concludes that although Iran's parliament has approved a number of ILO conventions, the Ministry of Labor has neither the authority nor political support to strictly enforce health and safety standards in the workplace. Instead, it falls to specific sectors, like the hydrocarbon sector, to enforce the standards themselves, and usually only those sectors seeking to attract foreign investment or partnership do so. -- UN Millennium Development Goals: In 2000, Iran adopted the UN's Millennium Development Goals (including on poverty alleviation, healthcare, and education) and agreed to devote both public and private sector resources to reach those goals by 2015. The GoI in 2001 created a "National Committee of Millennium Development Goals" to work with UNDP to work with the GOI and public and private sectors. However, according to Ali Farzin, a UNDP expert in Iran (please strictly protect),the Ahmadinejad government in 2005 disbanded that committee, leaving it solely to UN agencies in Iran to try to persuade public and private sectors to keep to Iran's MDP commitments. Next steps -------------- ¶8. (C) CSR-Iran's draft report, which it hopes to publish in October, will offer several recommendations, including: -- That the Iranian government pass legislation that either requires or offers incentives to companies to implement certain CSR practices (especially regarding transparency in financial reporting) and creates a national regulatory body responsible for helping Iranian companies meet international CSR standards; -- That Iranian companies appoint a CSR point of contact from ISTANBUL 00000367 004 OF 004 among senior management, to ensure CSR practices are understood by management and incorporated into businesses strategic planning; -- That the international community, and especially foreign business partners and investors, use their commercial influence to insist that Iranian partners implement core CSR principles, especially related to human and labor rights. ¶9. (C) After the report is published, CSR-Turkey and CSR-Iran plan to hold a CSR workshop in Istanbul in mid-October. Their goal is to bring together Turkish and Iranian NGOs, business leaders, trade union activists, academic experts, and other CSR advocates, to share and compare CSR "best practices" and agree on a "Roadmap to CSR Implementation in Iran." CSR-Turkey's director told us he hopes these workshops lead to a long-term partnership between CSR advocates in Turkey and Iran. CSR-Turkey also wants to expand CSR-Iran's network of regional partners and mentors, and intends (next year) to set up a regional CSR initiative that includes Iran, Turkey, Iraq, Jordan, and perhaps EU participants. Upbeat view over the longer term -------------- ¶10. (C) Despite their pessimistic initial findings about CSR implementation in Iran, CSR-Turkey and CSR-Iran experts remain upbeat. First, they see the international business community as "an unstoppable force" that will eventually compel any Iranian company wishing to stay globally competitive to adopt CSR practices, although they acknowledge that the risk of political instability and further sanctions is currently keeping many potential foreign partners away. Over the next three-to-five years, they predict a "massive change" in Iranian corporate behavior, as cooperation with foreign business partners becomes a necessity for Iran's economic survival rather than just a luxury. Second, CSR-Iran experts believe they have a cadre of like-minded supporters within Iran's economic-related Ministries, including some officials "just below the Minister level" who are pragmatic, often with technical backgrounds and U.S. or western university degrees, and who share the view that Iran's economy must reform and integrate to survive. Although these are not the officials currently making economic decisions for the regime, our contacts believe that "the pendulum will soon swing back" as Majles pressure forces Ahmadinejad to pursue more effective economic policies, requiring more competent economic expertise. Comment -------------- ¶11. (C) We applaud CSR-Turkey's efforts to help CSR-Iran promote modern business principles in Iran -- a long-term project in a profoundly challenging environment -- but we believe both organizations have an overly optimistic view on the extent to which the lure of integration with the global community may drive CSR practices in Iran. As an example, Turkey is becoming well-integrated into the world economy, but CSR practices here remain inconsistent at best, outside of the foreign firms and the larger holding companies, and the lack of specific CSR practices does not seem to have lessened foreign firms' willingness to partner with Turkish firms. Moreover, for Iranian companies seeking partnerships with Russians or Chinese firms, CSR practices will remain a secondary consideration. Generally, companies that must operate under the confined political and legal strictures of authoritarian governments and statist economies usually focus on doing what they need to do simply to survive. While outside pressure from international investors and markets, and bottom-up pressure from the small Iranian private sector are useful levers, we believe that the Iranian economy may only genuinely transform into a more modern, transparent, globally responsible and compliant one when regime leaders make a conscious decision to take such steps. In any event, we will stay in close contact with CSR-Turkey as its work with CSR-Iran evolves. End comment. WIENER