Revolutionising Iran's Private Sector Part 2: High Risk Investment and Trade Credit

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

2. Introduction Wimpole Is a Network of experts with unrivalled capabilities in the architecture and implementation of market instruments and infrastructure Institute for International Energy Studies (IIES) For Research on international energy markets and energy economic issues 2 13/06/10

3. Executive Summary • Development Investment • Capital Partnership • How does it work? • Outcome • Trade Credit/Working Capital • Clearing Union • How does it work? • Outcome 3 13/06/10

4. Capital Partnership (Nondominium) Users Value Custodian % Stock Investors Managers

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

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

7. Step Three: Contractors invest at least profit margin in exchange for stock Custodian Stock Units Stock Units Investors Developer

8. Step Four: investors buy high risk stock at a deep discount to cover contractor costs Custodian Stock Units Stock Units Investors Developer

9. Step Five: Development complete; manager appointed; stock sold at low discount Users Value Custodian % Stock Units Investors Managers

10. 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

11. 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

12. Clearing Union – Conventional Banking Value Seller Buyer Bank IOU IOU

13. Clearing Union - Seller accepts Buyer's IOU Value Seller Buyer IOU

14. IOU is guaranteed by Clearing Union of Sellers & Buyers collectively Value Seller Buyer IOU Guarantee Guarantee Pool

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

16. 1/ Buyer settles credit in money or 'money's worth' eg energy stock Value Seller Buyer Fee Fee Pool Guarantee Guarantee

17. 2/System identifies a 'chain' of IOUs A<B<C<D<E<A and 'nets' them out IOU Seller A Buyer B Fee Fee Pool IOU IOU Guarantee Guarantee Buyer E Buyer C Buyer D IOU IOU

18. 3/ Buyer defaults: system pays sellers and collects from buyer if possible Default Seller A Buyer Collects Pool Pays Default Seller B Pays

19. Service provider sets guarantee limits, handles defaults & manages system Value Seller Buyer IOU Fee Fee Pool Guarantee Guarantee Fee Service Service Provider

20. 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