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Legal Stability Contracts III: Why Do IFC-Backed Projects and Firms Not Use Legal Stability Contracts?

August 5, 2009

The list of companies that the IFC has backed resembles a “who’s who” list of leading Colombian businesses.  Do firms of this caliber show interest in legal stability contracts?  In other words, what does the list of IFC-backed Colombian firms tell us about legal stability contracts?

What do they have in common?  Almost nothing, as it turns out.  Only one of the firms with a published stability contract received IFC investment: Avianca, for its acquisition of a new fleet of aircraft. 

The regime of stability contracts is touted as a way of attracting foreign investment on the ProExport site.   Avianca is, in fact, foreign-owned (by a Brazilian firm).  But foreign firms do not appear to be the main users of legal stability contracts.  Colombia’s trade promotion authority, ProExport, reports that 42 stability contracts have been signed as of June 25, 2009 (see slide 15), though there are fewer than that listed on the ProExport website’s list of companies that have signed legal stability contracts.) 

Certainly some of the projects conducted by IFC-backed Colombian firms were located outside of Colombia, and thus not available for stability contracting.  But, there were many that appear to be eligible that have not been covered by stability contracts.

Bargaining power might be an explanation. After all, firms with IFC backing have a powerful multilateral organization as their “partner” and therefore may not need, at least in the IFC-funded projects, to purchase a stability guarantee, at least for rules that concern just the project.  IFC’s bargaining power is perhaps strong enough to prevent most discriminatory treatment by an arm of the Colombian state. Even so, if stability contracts ensure future income streams, at an affordable premium, a knowledgeable and powerful investor like IFC would show an appetite for them at least out of concern for changes rules that are not limited to specific projects. 

IFC-backed firms certainly have projects beyond those which directly receive IFC backing. Yet, even in those cases, no IFC-backed firm has signed a stability contract (other than Avianca).

One explanation is that at least half, in dollar terms, of the IFC’s investments were in the financial sector, and perhaps they are less suitable to the stability contract regime (which is driven by job-creating capital investments).  Many others relate to acquisition of equipment and free trade zones.  Perhaps those legal regimes explain the odd lack of IFC interest in stability contracts. (Representatives of the IFC are invited to contact me or post a comment if they can illuminate the subject of when stability contracts are viewed as useful in the their eyes.)  I will take a closer look at the specific legal rules that are the subject of each legal stability contract in a future post.

There are significant financial implications if a regime such as free trade zones and their favorable taxation and trade regulations were to be discontinued.  That might explain why the cement and concrete firm Cementos Argos signed a stability contract for its gigantic investment in its free trade zone manufacturing facility. According to the Argos contract, the investment was very significant in Colombian terms: COP$712,331,000,000 or roughly US$297,754,360 (at the October 31, 2008 exchange rate covering the first premium payment due), and paid a premium of COP$6,374,745 or $7,908,954.  The premium cost was undoubtedly dwarfed by considerations of the more than 60% reduction in tax rates on goods manufactured in a free trade zone. 

But many firms, both national and international, question why they should have to pay the government for what it should be doing — that is, ensuring a stable legal environment for the development of the country?  What does that imply about the rule of law in Colombia?  Does the risk of instability burden firms with deciding whether to a pay a steep, supplemental tax for this “special right,” and on others to factor in the risk when the economics do not support the premium?  Does the regime create a more than subtle form of pressure on firms to sign and pay, or pay down the road with problematic regulatory changes or changes in interpretations?

The table below identifies the IFC projects with stability contracts. Reader comment and criticism is invited.

No. Year Proj. No. Company Name IFC Amt.- $USM Notes Stab. Contract- Company Stab. Contract- Project?
1 2007 26235 Compania de Gerenciamiento de Activos Ltda.(CISA) NPLs $275 Purchase portfolio of Non-Performing Loans (NPLs) and other Non-Performing Assets (NPAs) a majority of which were accumulated by the government of Colombia post the financial crisis of 1999.    
2 2006 25520 Banco Davivienda S.A. $200 Acquisition of Granbanco SA.    
3 2008 27396 Termoflores $157.5 Construction of a 169 MW gas-fired combined cycle unit by the expansion/conversion of the existing gas turbines in Flores II and III    
4 2005 24282 Banco Davivienda S.A. $120 Expansion and consolidation of the Bank’s retail business while maintaining a strong presence in the mortgage industry.    
5 2007 25795 Org. Terpel SA $100 Capital expansion and recapitalization project    
6 2006 24463 Petrotesting Colombia SA $85 Oil and gas exploration, distribution services, equity and debt investment for $85M to strengthen financial position adoption of best practice corporate systems    
7 2007 26520 Grupo Bolivar $75 Recapitalization to separate cross-holdings of insurance companies     
8 2008 25930 Cartagena PortTerminal de Contenedores Cartagena SA (Contecar) $60 Four year capital expansion program to develop Contecar into a world class container port terminal.    
9 2008 25899 Avianca $50 Corporate loan to finance aircraft acquisition Yes Yes
10 2007 26473 Bogota Distrito Capital – Bogota Street Rehab-ilitation $50 Rehabilitation of the City’s urban streets network and incremental construction of sidewalks and walking/bike paths.    
11 2006 24811 Fundacion Social $50M Socially responsible projects targeting lower income households    
12 2007 25599 Sodimac $50 Home Improvement  retailer recapitalization    
13 2008 25672 Tecnoquimicas $45 $100M capital project for 8 existing chemical facilities mostly around Cali    
14 2008 26175 Abocol (Abonos Colombianos) $30 A Loan for carbon credits; upgrading the technology of the current NPK plant, installing a nitric acid plant, an ammonium nitrate solution plant, a calcium nitrate plant    
15 2007 24680 Interbolsa $30 Partial credit guarantee (“PCG”) local currency medium term bond to strengthen liquidity, diversify funding sources, and reduce market risk.    
16 2006 24934 Kappa Resources Colombia SA $30 Oil and gas exploration in the Magdalena Valley and the Cerrito gas field in the Catatumbo Basin near the city of Cucuta.    
17 2009 27549 Riopaila $30 Cost reduction and technological improvement program diversifying its agribusiness activities, adding co-generation capacity; replacing and modernizing equipment and machinery across production units; andrestructuring short- and medium-term debt that is maturing in 2008–2010.    
18 2007 25569 Cartones America SA , Cartones II $25 Acquire Chilempack facilities in Chile, upgrade and expansion of CAME’s manufacturing facilities in Colombia, Venezuela, Ecuador, Chile and Peru; and – refinancing existing short-term debt    
19 2008 26567 Crediservicios $25 Coinvestment with Crediservicios  in a Fondo de Capital Privado [Private equity Fund] for payroll deductible loans to low and middle income employees.    
20 2009 27961 Greystar $20 Exploration and pre-mine development phase of the Angostura project located 55 km by road from Bucaramanga (IFC’s first mining investment in Colombia)    
21 2007 25897 Procafecol (Promotora de Café de Colombia) $20 Expansion of 150 Juan Valdez coffee shops in Colombia and select international markets    
22 2005 22588 Women’s World Bank $20 Five entities’ investments tailored to expand lending activities, diversify funding sources and strengthen position in the market to serve an additional 70,000 micro-entrepreneurs.    
23 2008 26257 Finandina (Financiera Andina S.A.) $17 To undertake investment projects needed to finance improved freight distribution capacity within Colombia through consumers, micro entrepreneurs and transport vehicle owners    
24 2009 27780 Termo Rubiales $16.5 project is located in the Llanos Basin, 465 km from Bogotá in the Meta Department to support the development of Meta Petroleum, a promising player of the oil industry in Colombia    
25 2008 26399 Century Energy Corp. $15.5 Development, construction and operation of two small run-of-river hydropower plants in the Guadalupe river basin, 95 kilometers (km) north of the city of Medellin: arms-length, fixed price engineering, procurement and construction (EPC) and operation and maintenance (O&M) agreements with HMV Ingenieros.    
26 2007 25895 MEB Port (Terminal Maritimo Muelles El Bosque) $15 A loan for capital expansion program of Terminal Maritimo Muelles el Bosque S.A. (MEB) to develop and manage a new multipurpose port in the Bay of Cartagena, on Colombia’s Atlantic coast. Extension of the container terminal berths; expansion of the container yard; acquisition of an additional mobile crane and other container yard equipment; two additional warehouses/silos; the upgrade of the port’s IT systems.    
27 2007 25852 Tribeca Partners SA $15M Tribeca Fund I investment, to help fund reach target, give comfort to local investors not familiar with FCPs    
28 2009 27689 Uniminuto $8 Three projects in Cundinamarca, including expansion of two key facilities in Bogota and Soacha, as well as construction of a new (phase 1) facility in Girardot. For Increased Access to Tertiary Education Services.    
29 2009 27745 Covinoc SA $5 Strengthening Covinoc’s ability to administer pools of non-performing assets.    
30 2009 27952 Cartones $.756 Energy efficiency improvement project, as part of IFC’s Cleaner Production Lending Pilot initiative, at Cartones America’s Cali plant.    
31 2004 20932 Carvajal Expansion, rationalization and modernization of Paper Manufacturing/Conversion: School/Office Supplies facility in Brazil; Yellow Pages operations in Brazil; Book and Text Book Publishing/Editing operations in Mexico and Spain; Plastic Packaging modernizing Colombian facilities; environmental and social and health and safety improvements at some of the company’s facilities in and outside Colombia.    
32 2008 26538 Giros y Finanzas Compania de Financiamiento Comercial SA Microfinance and lending to low income households in Colombia    
33 2007 26520 Grupo Bolivar Recapitalize Insurance Companies and restore solvency margins in third largest local financial conglomerate in Colombia.    
34 2005 24514 Promigas Investments in additional gas transmission and distribution assets in Colombia as well as the acquisition of new assets throughout South America — additional gas transmission and distribution assets in Colombia as well as the acquisition of new assets throughout South America.    
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