Defeated Ex-CFO Re-Emerges to Upend Colombia Privatization Plan

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Rodrigo Toro, Isagen’s former chief financial officer, isn’t going to watch his old company be sold off without a fight.

The 62-year-old engineer, who led a failed attempt to buy the Colombian state-controlled hydropower producer in 2013, is among a group that successfully sued to suspend the latest auction last month of the government’s 5.3 trillion peso ($2.1 billion) majority stake. The delay has left bidders from Canada to Europe in limbo on a transaction that could have highlighted Colombia’s potential as an investment destination and helped offset slowing economic growth.

Instead, it has become a reminder of the difficulty of doing business in the Latin American nation, drawing attention to a legal and administrative system the World Economic Forum ranks below Guatemala and Honduras.

“What happened with Isagen is definitely a bad signal for international investors,” Mario Castro, a Colombia strategist at Nomura Holdings Inc., said in a telephone interview from New York. “It makes clear one of the institutional weaknesses of the country: legal uncertainty.”

The government says canceling the sale would be a setback in funding President Juan Manuel Santos’s signature infrastructure initiative, known as 4G, according to a response filed with the court. It’s meant to overhaul roads the economic forum says are worse than those in Bolivia and Kyrgyzstan.

The government established a development-bank fund to help construction companies finance spending on 4G projects, and the Isagen sale was supposed to provide equity, according to a November 2013 Colombian Finance Ministry presentation.

400 Workers

The court in charge of the case based the suspension on three complaints: one from a union, one from a workers’ group and -- “especially,” according to court documents -- the suit by Toro, who worked at the company for 14 years and says he represents more than 400 current and former workers who want to buy the business.

Toro, speaking in a telephone interview from Medellin, said he was called in to lead the “crusade” for a worker takeover during the 2013 sales effort. While he’s not against the transaction in principle this time, he says his group didn’t get fair treatment.

Under Colombian law, the government must offer special conditions during privatizations to current and former workers and related pension funds. That means first offering shares to this so-called solidarity sector before proceeding to a second phase that opens shares to the public -- including foreign funds and corporations.

Buying Restrictions

Toro and his group held talks with advisers and lenders, including Banco Itau BBA SA, Morgan Stanley and KPMG LLP, and intended to buy shares in the first round of the sale. Instead, Toro says the government placed unfair restrictions on the number of shares they could buy.

Pablo Cardenas, coordinator of the Finance Ministry’s legal affairs group, said in an e-mailed response to questions that the government’s opponents in the case are trying to confuse the public and “sabotage the process.” He said share limits are meant to discourage outsiders who may try to game the system by buying shares through the workers.

“The limits on this process are the same that have always existed in other sales,” Cardenas said. They are “limits that until now have been validated in court on various occasions.”

A definitive ruling on the lawsuits may take as long as three months, according to a May 20 e-mailed response to questions from Magistrate Hugo Bastidas.

The government was seeking a minimum price of 3,399 pesos per share, and Isagen’s stock had rallied to a high of 3,390 pesos in May before the court’s suspension. The shares have since dropped to 2,870 pesos.

Demand Outlook

Colombia’s Energy Ministry projects electricity demand will grow 3.6 percent a year during the next five years, making Isagen appealing to foreign companies that already have a foothold, including Toronto-based Brookfield Asset Management Inc. Brookfield is among the bidders, along with Courbevoie, France-based Engie, formerly known as GDF Suez SA, and Colbun SA in Santiago. Brookfield and Engie officials declined to comment. Colbun said it would wait for the Colombian courts to resolve the matter before considering its next steps.

The difficulty of selling Isagen underscores the prickly nature of state-asset sales. Most Colombian adults still remember the blackouts of the 1990s, which spawned changes in electricity policy and helped spur the creation of Isagen 20 years ago.

The government said in its response to the court last month that it gets a 3.5 percent dividend yield on its Isagen investment. If it invests the same amount of money in infrastructure loans, it said it can earn a 5 percentage point spread over inflation, which is currently 4.41 percent.

Bad Timing

The delay in the sale comes at a time when Colombia is least able to handle a hit to its infrastructure plans and cross-border investment flows, according to Nomura’s Castro.

Oil, which has plummeted 44 percent in price during the past year, accounts for more than half of exports and about 30 percent of foreign direct investment. The government also depends on oil revenue to subsidize spending. The economy grew at the slowest pace in two years during the first quarter as manufacturing and mining output contracted.

“If the sale doesn’t happen in the end, it puts at risk the development of these infrastructure projects,” Castro said. “I don’t see many options for the government to replace these $2 billion.”

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