Volume 4, Number 28, Page 1

Panamanian Privatization: The Most Recent Initiative: The Electricity Corporation

by Eduardo E. Morgan

The Institute of Hydraulic and Electric Resources (IRHE) has been traditionally one of Panama’s most profitable public utilities. Wholly owned by the state and until now a true monopoly, the IRHE is undergoing a transition to become a more efficient service by restructuring and privatizing its operations, providing prospective investors with assurances of reasonable profit margins, and supporting new antitrust legislation to promote free enterprise.

Law No. 6 of February 1997, which will regulate the new structure of electric services, has already been approved by the National Legislative Assembly of the Republic of Panama and published in the Official Gazette.

The restructuring of the IRHE, which is currently centralized into one giant company, will begin with the creation of not less than six stock-issuing corporations. These new corporations will be governed by the rules and regulations of the Company Law (Law 32 of 1927) and the applicable provisions of the Code of Commerce. These companies will divide all of the IRHE’s resources and personnel in accordance with their specific business purposes as defined in the respective articles of incorporation.

Originally, those companies will issue all of their shares, based upon the value of their respective assets, to the State. Beginning in September 1997, these shares will be offered, in blocks, to private companies.

The IRHE will be divided into three majors areas: 1) policy formulation; 2) regulation; and 3) provision of electric service. The third area will be sub-divided into generation, transmission and distribution of electricity. Only the transmission of electricity will remain 100% State-owned. This will ensure that all of the users of the system have unrestricted and non-discriminatory access to power lines.

The private sector’s purchase of share blocks of the State’s existing companies will be permitted under the following three-pronged regime:

1. Offerings of share blocks of up to 51% of the total share capital will be made for thermoelectric and distribution companies.

A block of up to 49% of the total share capital of the hydroelectric companies will be offered to the private sector along with a contract that will ensure the buyer the administration of the companies.

Ten percent of the State’s shares of the companies will be reserved for permanent employees, who will have a one-year option to buy the reserved shares. The remaining shares will be offered through the local stock exchange or by public bid with a limit of 5% per customer.

2. The construction and exploitation of new hydroelectric and geothermic plants and the transmission and distribution of electricity are subject to concession. Concessions for generating plants will be granted for 50 years and can be extended for an additional 50 years. Transmission concessions and distribution concessions will be granted for 25 years and 15 years, respectively; both are subject to extension.

As a financial incentive, the new law provides that companies generating electricity will be exonerated from paying import duties on the raw materials necessary for power production.

Given that electric service is considered a public utility, the government will maintain active participation in the companies for the following purposes:

to guarantee the quality of the service;
to encourage the growth of the areas covered by the service;
to assure efficient, continuous and uninterrupted service;
to guarantee free competition in this area;
to establish tariffs for the activities that remain uncompetitive;
to encourage the development of economies of scale;
to provide clients access to the services;
to protect the environment; and
to guarantee electric services in rural and non- concessioned areas.

The Regulatory Entity for Public Services, created by Law No. 26 of January of 1996, will serve as the supervisory and regulatory authority that will act on behalf of the government. This entity’s authority will be broad and will include the power to impose fines on clients and companies that violate the respective laws and regulations.

Eduardo E. Morgan is an attorney with the Panamanian law firm of Morgan & Morgan.