Public-Private Partnership Stories Panama: Instituto de Recursos Hidráulicos y de Electrificación Photo © Fernando Alonso Herrero / iStockphoto IFC advised the government of Panama on the privatization of its electricity gen- eration and distribution companies created from the restructuring of its vertically- integrated utility, IRHE. The privatization resulted in an immediate private capital inflow of $600 million and 10 percent reduction in retail tariffs, as well as more than $1 billion in private investment in the privatized companies. The transaction was completed in 1999. Strategic stakes in the generation companies were sold for a total of $302 million: 49 percent of Fortuna was awarded to a Coastal Power and Hydro-Quebec consor- tium for $118 million, 49 percent of Bayano and Chiriqui was sold to AES Corpora- tion for $92 million, and 51 percent of Bahia las Minas was awarded to Enron Inter- national for $92 million. Strategic stakes in the distribution companies were sold for a total of $301 million. Union Fenosa acquired Metro Oeste and Chiriqui for $212 million, and Constellation Power acquired Noreste for $89 million. This series provides an overview of public-private partnership stories in various infrastructure sectors, where IFC was the lead advisor. Overall, the restructuring and privatization of the electricity sector is IFC Advisory Services in considered to have been a success for Panama, with an immediate 10 Public-Private Partnerships 2121 Pennsylvania Ave. NW percent reduction in the average level of end-user tariffs. Washington D.C. 20433 ifc.org/ppp BACKGROUND BIDDING The government of Panama hired IFC to advise on the Seventeen operators were prequalified to bid on the distribution restructuring and privatization of its vertically-integrated companies and 26 on the generation companies. Bidders electricity utility. The government’s objectives were to introduce were permitted to bid on individual companies or selected competition in the sector, improve efficiency and service levels, combinations within overall restrictions on vertical and horizontal attract private capital for large investments needed, and prepare integration. The distribution companies were tendered two the sector for the introduction of regional competition in the months before the generation companies. This sequencing Central American energy market. ensured that buyers of the generation companies would have creditworthy private distribution companies as power purchasers. In 1997, the utility, Instituto de Recursos Hidráulicos y de Electrificación (IRHE), had 920 megawatts (MW) of installed The public competitive price-only bid process was held in capacity—two-thirds hydroelectric and one-third thermal, a September 1998. Strategic stakes in the three distribution distribution grid with 454,000 connections, 4,600 employees companies were sold for a total of $301 million. Union Fenosa (overstaffed relative to international benchmarks), and annual (Spain) acquired Metro Oeste and Chiriqui for $212 million, and revenues of $350 million. In addition, its system had technical Constellation Power, a subsidiary of Baltimore Gas & Electric, losses of 21 percent, including 15 percent in its distribution acquired Noreste for $89 million. Ten percent of the shares were network (also high by international standards). IRHE estimated reserved for purchase by employees at a 6 percent discount on the that an additional 560 MW of generation capacity would be price offered by the strategic investors. required over the next ten years to meet expanding demand, Two months later, strategic stakes in the four generation together with the rehabilitation of 236 MW of existing generation companies were sold for a total of $302 million: 49 percent of capacity. The total required capital expenditures for these the shares of Fortuna were awarded to a consortium formed by generation projects and related investments in transmission Coastal Power and Hydro-Quebec for $118 million, 49 percent and distribution was estimated at more than $1 billion. of Bayano and Chiriqui were sold to AES Corporation for $92 million, and 51 percent of Bahia las Minas was awarded to Enron IFC’S ROLE International for $92 million. Ten percent of the shares of Bahia IFC was hired by the government in late 1997 to act as lead las Minas and 2 percent of the shares of the generation companies adviser in the privatization of the generation and distribution were set aside for employee purchase at a 6 percent discount. companies resulting from the restructuring of IRHE. IFC’s role encompassed not only the sale of the companies, but also financial EXPECTED POST-TENDER RESULTS validation of the proposed restructuring and advice on the pricing and contractual arrangements between the new generation, Overall, the restructuring and privatization of the transmission and distribution companies. IFC assembled a electricity sector is considered to have been a success multidisciplinary advisory team (that included technical and for Panama. Its highlights include the following: legal consultants) and worked closely with IRHE’s restructuring • Proceeds of $600 million for the government. consultants and interministerial committe that was managing the process. The committee was chaired by IRHE’s CEO who played • The transfer of $250 million in government- a key role in leading the overall privatization. guaranteed debt to the private sector. • The transformation of a state power monopoly into TRANSACTION STRUCTURE seven private companies. The privatization of IRHE was part of a broader sectoral reform program that involved establishing a new regulatory framework, • An immediate 10 percent reduction in the average introducing a wholesale electricity market, and adopting a new level of end-user tariffs. tariff regulation. IRHE was restructured into four generation • Capital investments totaling more than $1 billion companies (Bayano, 192 MW; Bahia las Minas, 292 MW; by the privatized companies from 1999-2007. Fortuna, 300 MW; and Chiriqui, 222 MW); three distribution companies (Metro-Oeste, 195,000 customers; Noreste, • Improvements in technical service quality. 148,000 customers; and Chiriqui, 65,000 customers); and one transmission company that would remain in state hands. The 12/2008 privatization involved the strategic sale of 51 percent of the shares of the distribution and thermal generation companies, and 49 percent of the shares of the hydroelectric companies. Under the newly enacted electricity law, proceeds from the sale of shares were earmarked for a special investment fund for health and education projects.