96921 PUBLIC-PRIVATE PARTNERSHIPS BRIEFS Panama: Instituto de Recursos Hidráulicos y de Electrificación Photo: Fernando Alonso Herrero/iStockphoto. Used with permission. Further permission required for reuse. Overview IFC advised the government of Panama on the privatization of its electricity generation 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 per- cent of Fortuna was awarded to a Coastal Power and Hydro-Quebec consortium for $118 million, 49 percent of Bayano and Chiriqui was sold to AES Corporation for $92 million, and 51 percent of Bahia las Minas was awarded to Enron International 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 showcases how the World Bank Group supports the development and implementation of public-private partnerships. This support comes in the form of public sector loans, private sector finance, sector and transaction advice, guarantees, and output-based aid. PUBLIC-PRIVATE PARTNERSHIPS - DECEMBER 2008 Background The public competitive price-only bid process was held in September 1998. Strategic stakes in the three distribution The government of Panama hired IFC to advise on the companies were sold for a total of $301 million. Union Fenosa restructuring and privatization of its vertically-integrated (Spain) acquired Metro Oeste and Chiriqui for $212 million, electricity utility. The government’s objectives were to and Constellation Power, a subsidiary of Baltimore Gas & introduce competition in the sector, improve efficiency Electric, acquired Noreste for $89 million. Ten percent of the and service levels, attract private capital for large investments shares were reserved for purchase by employees at a 6 percent needed, and prepare the sector for the introduction of regional discount on the price offered by the strategic investors. competition in the Central American energy market. Two months later, strategic stakes in the four generation In 1997, the utility, Instituto de Recursos Hidráulicos y companies were sold for a total of $302 million: 49 percent of de Electrificación (IRHE), had 920 megawatts (MW) of the shares of Fortuna were awarded to a consortium formed installed capacity—two-thirds hydroelectric and one-third by Coastal Power and Hydro-Quebec for $118 million, 49 thermal, a distribution grid with 454,000 connections, 4,600 percent of Bayano and Chiriqui were sold to AES Corporation employees (overstaffed relative to international benchmarks), for $92 million, and 51 percent of Bahia las Minas was and annual revenues of $350 million. In addition, its system awarded to Enron International for $92 million. Ten percent had technical losses of 21 percent, including 15 percent in its of the shares of Bahia las Minas and 2 percent of the shares of distribution network (also high by international standards). the generation companies were set aside for employee purchase IRHE estimated that an additional 560 MW of generation at a 6 percent discount. capacity would be required over the next ten years to meet expanding demand, together with the rehabilitation of 236 World Bank Group Role MW of existing generation capacity. The total required capital expenditures for these generation projects and related IFC was hired by the government in late 1997 to act as lead investments in transmission and distribution was estimated at adviser in the privatization of the generation and distribution more than $1 billion. companies resulting from the restructuring of IRHE. IFC’s role encompassed not only the sale of the companies, but also Project Description financial validation of the proposed restructuring and advice on the pricing and contractual arrangements between the The privatization of IRHE was part of a broader sectoral new generation, transmission and distribution companies. reform program that involved establishing a new regulatory IFC assembled a multidisciplinary advisory team (that framework, introducing a wholesale electricity market, and included technical and legal consultants) and worked closely adopting a new tariff regulation. IRHE was restructured with IRHE’s restructuring consultants and interministerial into four generation companies (Bayano, 192 MW; Bahia committe that was managing the process. The committee was las Minas, 292 MW; Fortuna, 300 MW; and Chiriqui, 222 chaired by IRHE’s CEO who played a key role in leading the MW); three distribution companies (Metro-Oeste, 195,000 overall privatization. customers; Noreste, 148,000 customers; and Chiriqui, 65,000 customers); and one transmission company that would remain in state hands. The privatization involved the strategic sale Outcomes of 51 percent of the shares of the distribution and thermal Overall, the restructuring and privatization of the electricity generation companies, and 49 percent of the shares of the sector is considered to have been a success for Panama. Its hydroelectric companies. Under the newly enacted electricity highlights include the following: law, proceeds from the sale of shares were earmarked for a • Proceeds of $600 million for the government. special investment fund for health and education projects. • The transfer of $250 million in government-guaranteed Seventeen operators were prequalified to bid on the debt to the private sector. distribution companies and 26 on the generation companies. • The transformation of a state power monopoly into seven Bidders were permitted to bid on individual companies or private companies. selected combinations within overall restrictions on vertical • An immediate 10 percent reduction in the average level and horizontal integration. The distribution companies were of end-user tariffs. tendered two months before the generation companies. This • Capital investments totaling more than $1 billion by the sequencing ensured that buyers of the generation companies privatized companies from 1999-2007. would have creditworthy private distribution companies as • Improvements in technical service quality. power purchasers. worldbank.org/ppp @WBG_PPP scribd.com/wbg_ppp