Revolutionising Iran's Private Sector

Part 2: High Risk Investment and Trade Credit

Chris Cook

Tehran, 2 July 2012

Introduction

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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 SummaryDevelopment Investment

Capital Partnership How does it work? Outcome

Trade Credit/Working Capital Clearing Union How does it work? Outcome

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Capital Partnership (Nondominium)

Users

Custodian

ManagersInvestors

Value

Stock %

Step One: Undeveloped asset transferred to Custodian in exchange for stock

CustodianUndeveloped

Asset

Investor

Stock Units

Step Two: Developer invests concept and time ('Intellectual Capital') for stock

Custodian

DeveloperInvestors

Stock Units Stock Units

Step Three: Contractors invest at least profit margin in exchange for stock

Custodian

DeveloperInvestors

Stock Units Stock Units

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

Custodian

DeveloperInvestors

Stock UnitsStock 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 assetsNew asset class Interests are aligned through a share in the

outcomeHigh 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

Seller Buyer

IOU

Value

IOU is guaranteed by Clearing Union of Sellers & Buyers collectively

Seller Buyer

IOU

Value

Pool

GuaranteeGuarantee

Seller & Buyer pay guarantee charge into Pool held by Custodian

Seller Buyer

IOU

Value

Pool GuaranteeGuarantee

Fee Fee

1/ Buyer settles credit in money or 'money's worth' eg energy stock

Seller Buyer

Value

Pool GuaranteeGuarantee

Fee Fee

2/System identifies a 'chain' of IOUs A<B<C<D<E<A and 'nets' them out

Seller A Buyer B

PoolGuaranteeGuarantee

Fee Fee

Buyer C

Buyer D

Buyer E

IOU

IOU

IOU IOU

IOU

3/ Buyer defaults: system pays sellers and collects from buyer if possible

Seller A Buyer

Default

Pool

Collects

Pays

Seller B

Default

Pays

Service provider sets guarantee limits, handles defaults & manages system

Seller Buyer

IOU

Value

Pool GuaranteeGuarantee

Fee Fee

ServiceProvider

FeeService

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 sharedPerfect service for Chamber of Commerce to

provide for members