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Electricaribe had a long history of poor service and failure to invest a required $370 million on grid improvement. (Photo: Electricaribe)
Wednesday, April 19, 2017
Perspectives

Colombia: Behind Electricaribe Intervention


Gas Natural’s failure to invest caused Electricaribe problems, most experts say.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Spanish utility Gas Natural said last month that it is suing the Colombian government after it seized one of its companies, electricity provider Electrificadora del Caribe, known as Electricaribe. Colombian authorities announced they were liquidating Electricaribe, despite objections from Gas Natural, arguing that the company’s inadequate distribution network, which provides electricity to Colombia’s Caribbean coast, was responsible for frequent blackouts. Gas Natural has accused Colombia of “expropriation.” What is behind the dispute, and why could the parties not come to an agreement before going to arbitration? Will the case, which Gas Natural is bringing to the United Nations Commission on International Trade Law, dissuade other international energy companies from investing in Colombia? What will it take to bring Colombia’s electrical grid up to higher standards?

Joel Ross, Americas analyst at risk analysis firm Verisk Maplecroft: Colombia has one of the most pro-business governments in Latin America. As well as providing good investor protections, there have been no expropriations over the past five years. In fact, company property rights are at greater risk from judicial decisions in defense of community rights than they are from changes in government policy. Accordingly, the country performs considerably better than Peru, Argentina, Brazil and Ecuador in Verisk Maplecroft’s Respect for Property Rights Index. In this instance, it appears that the reasons for Electricaribe’s liquidation are not due to unfair government interventionism, as the company claims. Allegations that the government was not paying subsidies on behalf of poor households do not fully account for the Spanish-owned company’s woes. The company failed to upgrade electricity infrastructure, despite tens of millions of dollars of public investment. The company’s failure to invest has led to inefficiencies and increased costs. Therefore, its financial problems are mostly its own doing. Providing utility services in the poor and deprived Caribbean is a challenge for companies. Some have succeeded, like water company Triple A (AAA) in Barranquilla, and others have failed, such as water company Hidropacifico in Buenaventura. Electricaribe falls into the latter category. The claim by Electricaribe that its seizure and subsequent liquidation by the government was an ‘expropriation’ is therefore unlikely to dissuade foreign investors from going into Colombia. The upgrades needed for infrastructure provide a major business opportunity that, together with the robust regulatory framework and the post-conflict landscape, will maintain the country firmly on Latin America’s investors’ map.

Leopoldo Olavarria, partner and head of energy for Latin America, and Nicolas Arboleda, senior associate, at Norton Rose Fulbright Colombia S.A.S.: Colombian authorities have argued that the dispute arose mainly due to: 1) the lack of expansion/optimization of the distribution network by Electricaribe, and 2) the deteriorating financial situation of Electricaribe that would, in any case, derive in Electricaribe’s liquidation. The parties in dispute could not, according to Colombian authorities, settle the dispute, because Electricaribe’s financial condition was poor, and the company’s financial projections did not seem to evidence that its financial condition would improve in the short to medium term. Hence, the authorities decided to seize the assets and order the liquidation of Electricaribe. A claim of this size, with important media coverage, certainly generated noise for certain investors. In our view, however, this case should not necessarily dissuade educated investors, because Electricaribe’s case is, in a way, unique. Electricaribe was aware that a seizure of its assets was possible, due to alleged repeated failures to meet regulatory standards and conditions required of all electric power transmission and distribution companies in Colombia (e.g., a reliable and efficient expansion of the network). Colombia requires significant investments to bring its grid to higher standards. These investments should come from both the government and private sector. The objective of enhancing the grid will benefit from a government-sector, long-term view of growth in the electric power market to foresee what measures may be required in the future. This would be preferable to short-term reactions to shortages or emergencies, which occasionally do not provide suitable permanent solutions. Enhancing the grid would, for example, benefit new renewable energy generation projects, which currently face difficulties in accessing the grid.

John Padilla, managing director, and Maria Claudia Diaz, senior consultant, at IPD Latin America: Colombian authorities may have had their reasons to liquidate the company, including a long history of poor service and failure to invest a required $370 million on grid improvement. But Electricaribe is also owed more than $1.3 billion from end users who simply haven’t paid. The culture of non-payment stems not just from its large portion of poor customers, but also public institutions, including local government buildings, hospitals and schools. An electric distribution company, Electricaribe serves seven Caribbean states in northeastern Colombia. Although many believed the government needed to intervene at some level, the decision to go directly to liquidation was largely political. Upcoming elections and President Juan Manuel Santos’ obsession with trying to keep all factions happy played a significant role. Liquidation is the government’s right over a public utility, but the details as to why and how it made that move will matter. That information should emerge in the United Nations tribunal. Equally important is who will take over the troubled utility and how service will be maintained. Ultimately, whether liquidation was justified or not, the decision does not send a good signal to the market. It is just one of many recent, troubling government choices that have also affected the exploration and production and mining sectors. The decision to yank oil company Hupecol’s environmental permit from its Serranía block stands as an example. Colombia has long been considered to have strong rule of law. But the Electricaribe decision will not encourage investors. While the country may have certain strong arguments in this case, it has begun to build a discouraging track record.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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