Revolutionising Iran's Private Sector Part 2: High Risk Investment and Trade Credit Chris Cook Tehran, 2 July 2012

Introduction 13/06/102 Wimpole Institute for International Energy Studies (IIES) Is a Network of experts with unrivalled capabilities in the architecture and implementation of market instruments and infrastructure For Research on international energy markets and energy economic issues

Executive Summary  Development Investment  Capital Partnership  How does it work?  Outcome  Trade Credit/Working Capital  Clearing Union  How does it work?  Outcome 13/06/103

Capital Partnership (Nondominium) Users Custodian ManagersInvestors Value Stock %

Step One: Undeveloped asset transferred to Custodian in exchange for stock Custodian Undeveloped Asset Investor Stock Units

Step Two: Developer invests concept and time ('Intellectual Capital') for stock Custodian DeveloperInvestors Stock Units

Step Three: Contractors invest at least profit margin in exchange for stock Custodian DeveloperInvestors Stock Units

Step Four: investors buy high risk stock at a deep discount to cover contractor costs Custodian DeveloperInvestors Stock Units

Step Five: Development complete; manager appointed; stock sold at low discount Users Custodian ManagersInvestors Value % Stock Units

Example: Wind Turbine  Wind Turbine will generate 2,500 Mega Watt Hours per year for 20 years and costs €1m to install  20% to land owner and maintenance contract  80% available to create 'stock' – 40,000 Mega Watt Hours  Market price of electricity is €5 per Mega Watt Hour  Development investor pays €1m to buy 25,000 Units of 1 Mega Watt Stock each at €4 – ie a discount of €1 or 20%  If after one year he sells 25,000 Units to pension investors at €4.80 he gets a Rate of Return of 16% pa  If after two years, the rate of return is 8% pa; four years 4% pa etc

Outcome of Capital Partnership  Development financing for new productive assets  New asset class  Interests are aligned through a share in the outcome  High risk investors buy stock units at a deep discount and sell at a low discount to low risk investors to generate profit  Users will always buy stock units to return against use if the price is below the physical market price

Clearing Union – Conventional Banking Seller IOU Buyer Bank Value IOU

Clearing Union - Seller accepts Buyer's IOU SellerBuyer IOU Value

IOU is guaranteed by Clearing Union of Sellers & Buyers collectively SellerBuyer IOU Value Pool Guarantee

Seller & Buyer pay guarantee charge into Pool held by Custodian SellerBuyer IOU Value Pool Guarantee Fee

1/ Buyer settles credit in money or 'money's worth' eg energy stock SellerBuyer Value Pool Guarantee Fee

2/System identifies a 'chain' of IOUs A<B<C<D<E<A and 'nets' them out Seller ABuyer B Pool Guarantee Fee Buyer C Buyer D Buyer E IOU

3/ Buyer defaults: system pays sellers and collects from buyer if possible Seller ABuyer Default Pool Collects Pays Seller B Default Pays

Service provider sets guarantee limits, handles defaults & manages system SellerBuyer IOU Value Pool Guarantee Fee Service Provider Fee Service

Outcome of Clearing Union  Trade credit with banks as service providers not lenders  Goods and services change hands by reference to Rial or $, not necessarily in exchange for Rial or $ currency  Credit risk shared by sellers and buyers collectively  No 'interest' (money for the use of money)  Default costs and operating costs shared  Perfect service for Chamber of Commerce to provide for members