Public-Private Partnership Stories Brazil: COELCE Power Utility Photo © Ricardo De Mattos/ iStockphoto The government of Ceará, one of Brazil’s fastest growing states in the 1990s, hired IFC as the principal advisor to implement a modernization program in the power sector that included the privatization of Companhia Energetica do Ceara (COELCE), the state power utility. With assistance from IFC, the government sold 90 percent of COELCE’s voting shares, representing 55.4 percent of the company’s total capital, to a consortium formed by Spain’s Endesa and Chile’s Enersis. At auction, the government received $880 million for the shares, 27 percent above the minimum price. The concession agreement was signed in April 1998. This series provides an overview of public-private partnership stories in various infrastructure sectors, where IFC was the lead advisor. A Japanese trust fund supported IFC’s work to establish Brazil’s IFC Advisory Services in first state regulatory agency as part of the COELCE privatization Public-Private Partnerships 2121 Pennsylvania Ave. NW mandate. Washington D.C. 20433 ifc.org/ppp BACKGROUND 2002-2006, and 1 percent thereafter) to a government fund exclu- Under the leadership of Governor Tasso Jereissati, the state sively used to support rural electrification and other government contributions to the distribution segment. of Ceará in Northeast Brazil successfully implemented major economic and social reforms that created the foundation for • Maintaining all COELCE’s obligations regarding social programs, public lighting, and the power purchase agreement for private sector development. As a result, the demand for power a proposed 60 megawatt wind farm and a proposed 240 megawatt was growing at the rate of 10 percent a year. independent power project. The Secretary of Infrastructure recognized that attracting private BIDDING investors to Ceará would require investing in critical infrastructure Two bids were submitted for the COELCE privatization. The and ensuring high quality electricity service. COELCE’s winning bidder was a consortium formed by Spain’s Endesa and operations had been under close scrutiny and the utility presented Chile’s Enersis, which paid the government $880 million for 55.4 its first $5 million profit in 1995. The Secretary realized that the percent of the utility’s total capital (90 percent of voting shares), privatization of the utility could now be used to leverage financial 27 percent above the minimum price. Most of the remainder of resources necessary to invest in other infrastructure sectors. At the COELCE’s capital consisted of preferred shares same time, the government recognized the need to balance social listed on the stock exchange. objectives with the concerns of private investors. IFC’S ROLE IFC organized an international tender to select a strategic investor EXPECTED POST-TENDER RESULTS for COELCE, which at the time was selling 4,400 gigawatt hours • One of the first large power sector privatizations in a year to 1.4 million customers. Ceara was at the time one of Brazil’s Northeast Region. the poorest states in Brazil with a population of about 6 million • Government received $880 million from the sale of people. About half lived in the capital and the rest were scattered 55.4 percent of COELCE’s total capital, 27 percent in small urban centers and rural areas. above the minimum price. In addition to organizing the bidding process, IFC developed a privatization strategy, supervised the technical/economic/legal due • COELCE privatization helped ensure that Ceara’s diligence on the company, built a financial model to determine the power needs were met and gave the state a company’s value, directed the preparation of contract documents, competitive advantage to attract private sector spearheaded informal consultations with different stakeholders, development. and assisted in the investors’ due diligence. • Creation of Brazil’s first multi-sector state The design and creation of Brazil’s first multi-sector state regulatory agency served as a model for other regulatory agency was a key component of the IFC mandate. IFC’s states in Brazil. role included conducting studies necessary to define the agency’s • Proceeds were used to support investment structure, drafting a state law to create the agency, and designing programs in infrastructure and to establish a institution-building and training programs for the agency’s pension fund for state government employees. effective operation. TRANSACTION STRUCTURE 02/2010 The transaction involved the sale of 90 percent of the COELCE’s voting shares, representing 55.4 percent of the utility’s total capital. In addition, under a separate offer, 10 percent of the state-owned shares, corresponding to 8.97 percent of the total voting shares, were sold to COELCE employees for 50 percent of the established minimum price. The Share Purchase Agreement defined the obligations of COELCE’s controlling shareholders to the state of Ceará, while the concession agreement defined the obligations to the conceding power at the federal level. Besides the typical obligations of a concessionaire, the controlling shareholder’s primary obligations to the state of Ceará included: • Contributing a specific percentage of COELCE’s annual revenues (2 percent from 1997 – 2002, 1.5 percent from