Company’s Reserves and Profits


From “Oil Nationalisation and Managerial Disclosure: The Case of Anglo-Iranian Oil Company, 1933-1951”

Chapter 4: Profit distribution by the AIOC

Author : Neveen Abdelrehim | The university of york

A general view showing the Abadan oil refinery. 1945 (Photo by Dmitri Kessel/The LIFE Picture Collection/Getty Images)

Since the 1933 concession, the Iranians had found it difficult to arrive at an
assessment for the division of profits[525]. As mentioned earlier in the chapter, the 1933 Agreement offered Iran a share in AIOC‟s overall profits around the world, equivalent to 20 percent of dividends distributed among holders of common stock in excess of £671,250[526]. The 1933 concession did not bring any substantial changes to the extremely unequal shares nor did it create a significant increase in the absolute value of the oil income of the Iranian government[527]. Karshenas has pointed out that although the total profits of AIOC constituted a formidable sum in the Iranian economy, the Iranian government‟s share of the profits was relatively very small[528]. Gidel‟s Memorandum called for the method of calculation of the company‟s various reserves to be clarified in an accurate manner[529]. Professor Gidel recognised that the AIOC‟s treatment of depreciation was seen as creating a misleading reduction of profits with the aim of reducing the amount it was required to pay the Iranian government[530]. He argued from two different perspectives: First, the government would in effect have paid for a part of the depreciation of properties outside Iran to which it had no right at the end of the concession and secondly, the government would in effect have been paying towards the depreciation of the company‟s properties in Iran which should under the concession revert to the government at the end of the concession free of any cost and at the end of the concession the government would have no share in the reserves provided for this purpose. The result would be that the ordinary stockholders would benefit from the reserves at the end of the concession and from the company‟s property outside Iran, while the government‟s reversionary right to the property inside Iran would be defeated[531].
Moreover, the Prime Minister Ali Mansur commented that the reserves were implausibly large, a matter which should be cleared up thoroughly and without any ambiguity so that the interests of Persia should be completely safeguarded[532]. He explained that
(The) AIOC has acted under instructions from the British government and reserved terrific amounts in order not to pay more than what the company laid down in the 1933 Agreement, however it should be stipulated in the Supplemental Agreement that the Persian government would share in all the reserves up to 20% whether visible or invisible[533]. The AIOC became anxious and was ready to re-open discussions with the Iranian government rather than let the latter‟s concerns become magnified into serious grievances[534]. The Board of the company decided to discuss with the Iranian government the policy, advocated by the British government, of suspending payment from the General Reserve, resulting in hardship to Iran[535]. The company maintained that the only amount available to the Iranian government was 20% of its general reserve at the date of expiration of the concession or of its surrender[536].
Other reserves, it claimed, such as those for taxation, preference dividends and bad debts, could not be calculated „with absolute accuracy‟ and were not likely to be payable to shareholders unless they were found to have been overstated[537]. As for the Iranian claims that depreciation should be divided between properties inside and outside Iran; the AIOC argued that the assets in Iran were contained in different accounts and that depreciation was provided separately for each company. The AIOC declared, however, that its accounts included, in addition to the Iranian assets, certain small assets outside Iran which amounted to less than 1% of the total gross value[538]. Their implication was that only trivial amounts of non-Iranian asset depreciation were being charged against Iranian profits. As previously demonstrated, the AIOC paid much more in income taxes to the British government than it did in royalties to the Iranian government, and this was regarded with increasing concern in Iran[539]. The following section draws upon the arguments developed here to provide further evidence concerning the Iranian claims. Detailed financial analyses were conducted for the share of profits using data from the 1948 – 1950 AIOC Annual Report and Accounts, to contrast the profit shares for these periods and re-examine the distribution of the firm‟s pre-tax profit during the company‟s nationalisation to three stakeholder groups: the Iranian Government, the British Government and other AIOC shareholders. As discussed in the introduction, the British government had exploited the Iranian oil deposits according to its own interests (for example, the control of oil for its navy) and acquired a majority shareholding (51%) stake in the AIOC. Meanwhile, the AIOC shareholders had a 49% stake of ordinary shares not controlled by the British government and the owners of the preference shares. Tables (6), (7) and (8) compute a more detailed analysis of these shares of profits using data from the 1948, 1949 and 1950 AIOC Annual Report and Accounts to examine how compatible they are with the claims made by either side. As can be seen, Table (6) computes a more detailed analysis of these shares of profits, using data from the 1948 AIOC Annual Report and Accounts, to examine the distribution of the firm‟s pre-tax profits to three stakeholder groups: the Iranian Government, the British Government, and other AIOC shareholders. The company‟s financial reports play a significant role for a number of reasons. They were analysed by both sides as evidence for and against changes to the basis on which the AIOC was taxed and also for the royalties paid under the concession. Moreover, a calculation of the other elements of the return made to Iran arising from the AIOC‟s activity is set out in the table below.

As shown above in Table (6) panel (A), an estimated 87% of the profit and other
figures are attributed to Iranian activities in Iran. The main aim of the analysis in this panel is to show the oil contribution of each country and determine exactly where it came from. Panel (B) illustrates the distribution of the AIOC profits and how it was allocated among three different stakeholder groups: the Iranian government, the British government and other AIOC shareholders. From the accounting analysis shown in Panel (B), it is obvious that the British government received a massive amount in taxes in 1948- the British Treasury had accrued £35 million in tax revenue for that year. Iran, however received £9.1 million in royalties and taxation for the same year, whereas the proportions in 1947 were £16.8 million and £7.1 million respectively[540]. Moreover, it worth noting that the total shares for the Iranian government was 16.7%, implying that 83.3% accrued to British equity interests; with the British Government‟s share predominating. It is crucial to note that, as argued by Penrose, when firms are vertically integrated, the entire integrated group is the relevant unit for the calculation of profitability and any profit or loss generating from the intermediate stages would be relevant only for internal accounting purposes or for taxation[541]. In this case, however, we do not have very complete and detailed historical financial information about the affiliates of AIOC in the underdeveloped countries and it is perhaps partly for this reason that the accounting analysis does not include the accounts generating from the AIOC subsidiaries. Meanwhile, the bulk of the AIOC income is derived from the production of crude oil and its refining, calculated on the basis of petroleum activities in Iran but the income has not been traced beyond that region to the final consumers. The analysis therefore does not include income derived from transport and marketing outside the region. Similar analyses were conducted for financial years 1949 and 1950 illustrating that the total profits of AIOC constituted a formidable sum in the Iranian economy and the Iranian government‟s share in the profits was relatively very small, as illustrated in Tables (7) and (8).

As shown above in Table (7), above, relating to 1949, the British government
received a massive amount of taxes in this year: the British Treasury accrued £26.9 million in tax revenue, whilst Iran received £13.5 million in royalties and tax revenue. It is worth noting that the total share for the Iranian government was 27.8%, implying that 72.2% accrued to British equity interests; with the British Government‟s share predominating. However, it is worth highlighting the fact that the Iranian royalties increased in 1949 by 4.4 million and the British equity interests declined by 11.5%[542]. The above explains how the AIOC had enriched itself with the proceeds of their operations in Iran and failed to generate significant new loan or equity capital for the Iranians.

As can be seen in Table (8), relating to 1950, the total share for the Iranian
government dropped to 19.2%, implying that 80.8% accrued to British equity interests, with the British Government‟s share predominating. The British government received a massive amount of taxes in 1950 because the British Treasury accrued £53.9 million in tax revenue (from AIOC) whilst Iran received £16.0 million in royalties and tax revenue. Thus, the above implies that in spite of the £2.5 million increase in royalties in 1950, the Iranian government share decreased by 8.6 % and the share of British equity increased by 8.8%, demonstrating that the AIOC had enriched itself with the proceeds from their operations in Iran. In addition to the above evidence, the Majlis deputy, Allahyar Saleh, addressed the fact that AIOC was accumulating exorbitant profits at Iran‟s expense enabling it “to self-finance a host of other profitable companies”. He summarised his opinion by stating that Iran had earned from her oil no more than crumbs and said that Iranians “are not prepared… to finance other people‟s dreams of empire from our resources”[543]. In a similar vein, Makins, deputy under secretary at the Foreign Office, expected the company‟s statement to “cause a furore” because “the gross profit and the deduction of the United Kingdom taxation have more than doubled in relation to the figures of 1949”. By contrast, Iranian royalties had increased from £13.5 million in 1949 to only £16 million[544]. In 1950, Northcroft met Musaddiq informally and took the opportunity to put the company‟s case. In a note of the meeting, Northcroft recorded that he gave Musaddiq figures that revealed that Iran‟s income was larger than that of the British Government and that he “suggested that the shareholders of the Company, who after all were the owners, were probably the most hard done by of all, as for the last year or so they had been only receiving something like 5% of the Company‟s annual profits as a return for their investment”[545]. However, as illustrated in Table 8(b), the empirical evidence illustrates that the contrary was true, because the shareholders were receiving 16.35% of the company‟s annual profits and not 5%. The company seems to have deliberately misled the Iranians by giving them incorrect information. This was presumably because it was alert to the fact that the Iranian government would make made a strong case in support of their contention that the profit-sharing element of their royalty was not in practice working in the way they expected. This assumption would provoke in them a strong feeling of grievance[546]. Within the above context, it is clear that Fraser used his statement in the annual reports as a piece of propaganda to present the Iranian Government as unreasonable and to portray his generosity, by the proposed deal for increased royalty payments under the Supplemental Agreement of 1949, as “the most advantageous offered to any country then producing oil in the Middle East”[547]. Fraser criticised Razmara‟s secretive behaviour[548]. On the Iranian side, Razmara‟s objective was to avoid a conflict with the British and keep the details of the 50/50 discussions secret as a result, in part because he feared public opinion would be disappointed if aware that anything less than nationalisation were being considered[549]. On a literal reading of this statement in the context of the explosive situation, it can only be concluded that Fraser did not understand Razmara‟s royalist political objectives and the essential role of secrecy if they were to be achieved. As the AIOC was intended to be a principal beneficiary of the secrecy, it is difficult to comprehend the views of Fraser. Moreover, Shepherd later admitted that he had written „the gist‟ of Razmara‟s speech to the Oil Committee on 3rd March[550]. Alternatively, and perhaps equally unlikely, is that Fraser simply misunderstood the mood of the Iranian people: such misjudgement was symptomatic of paternalist colonial attitudes. A more likely interpretation therefore is the role of the Chairman‟s statement as a piece of propaganda, in which the public face of a „reasonable‟ company is portrayed, and, consistent with the wider British discourse, nationalism is treated as inconsequential and ephemeral[551]. Perceived unfairness of profit distribution and Iranians‟ strong mistrust of the AIOC led to deep bitterness against imperialism and were the precursor for the vigorous and ever-growing desire for autonomy and nationalisation. Britain feared that the existing political situation in Iran could threaten the flow of oil from Iran, which would negatively affect the production and exports of the company, and so considered nationalisation as a potential threat. In a similar vein, Morrison, Leader of the House of Commons and Foreign Secretary, asserted that If the Iranian oil supplies ceased to flow from Iran, the consequences upon the economy, the life, and the political and strategic future of wide areas throughout the world would be disastrous, since about a quarter of oil products which AIOC draws comes from Abadan[552]. A series of unsuccessful negotiations culminated in the subsequent ratification of nationalisation of AIOC‟s Iranian assets by Musaddiq on 1st May 1951. Musaddiq believed that the only means of escape from the company‟s oppression was to nationalise the AIOC‟s holdings[553]. The repercussions were potentially serious, not just for the company, which lost a significant proportion of its assets, but for wider regional, and indeed global, geopolitics.


 

Notes & References
525. Mansoor, State-Centered vs. Class-Centered Perspectives, 13-14.

526. AIOC Annual Report and Accounts, 1950, 14.

527. Karshenas, Oil, State and Industrialization in Iran, 81.

528. Ibid, 80.

529. Gidel Memorandum, 6.

530. Depreciation is an estimate and a normal feature of accounting practice, but there is considerable scope for it to be used to manipulate profit.

531. BP 126422, Note of first meeting of the understanding committee on 1st May 1949, 9.

532. Ibid, 8.

533. BP 126343, Notes on Supplemental Agreement handed by Ali Mansur to Shepherd on 3rd June
1950, 1.

534. BP 126407, Report on visit to Tehran 31st August to 26th October 1948, 5.

535. Ibid, 6.

536. Gidel Memorandum, 30.

537. Ibid.

538. BP 72188, Royalty questionnaire and answers, 9.

539. Keddie, Modern Iran, 124.

540. 1947 figures from Bamberg, The History of the British Petroleum Company, 325; 1950 figures calculated from table 4.

541. Penrose, The large International firm in developing countries, 153.

542. As illustrated in Tables 3 and 4, the Iranian royalties increased from £9.1 million in 1948 to 13.5 million in 1949 and the British equity interests declined from 83.35% in 1948 to 72.2% in 1949.

543. Elm, Oil, Power, and Principle: Iran’s oil nationalisation and its aftermath, 180.

544. FO371/91611, Minute by Makins, 9 Nov, 1951.

545. BP 126347, Interview with Dr Musaddiq, 9th August 1950

546. BP 126407, Report on visit to Tehran 31st August to 26th October 1948, 48.

547. AIOC Annual Report and Accounts, 1950, 13.

548. Ibid.

549. Ansari, Modern Iran since 1921, 111.

550. Elm, Oil, Power and Principle: Iran’s oil nationalisation and its aftermath, 80.

551. Ansari, A. M. Modern Iran since 1921, 112.

552. House of Commons, Parliamentary debates 21 June 1951, 747.

553. BP 126349, press extracts No. 816, Dr. Musaddiq‟s letter to ITTILA‟AT on 20th November 1950, 3.

 

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