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Selling of ISA, a good deal for the government

“What they are doing is an alternative to financing for the Government, selling ISA in an accelerated manner without complying with the Law of Alienation for state companies,” says Camilo Díaz, Universidad Nacional de Colombia (UNal) Professor and Director of the Economic Sciences Analysis Unit (UACE, for its Spanish acronym).


In January, this Ministry and Ecopetrol signed an exclusivity agreement for the acquisition of 51.4% of the outstanding shares of ISA, whereby the Government could only have negotiations with the oil company.


This agreement is possible because Ecopetrol is managed by the government with 88.5% of the shares, therefore, it could be said that the state is acquiring a state company of which it already owns 51.4 %.


In a normal process, when an asset of the country is going to be sold the steps included in Law 226 of 1995 should be followed, which says that when a state company is to be alienated, it should be first offered to the employees, former employees, pensioners, solidary sector and then, it may be sold to the general public or national and foreign investors.


According to the signed agreement, they are holding conversations to help Ecopetrol buy ISA shares in an amount close to Col $14B.
 

Listen: Selling of ISA, an UNal analysis (In Spanish)
 

The role of the government in the process


All the assets the state has in industrial or commercial companies are managed by the government through the Ministry of Finance and Public Credit.


“Their job is to perform a correct appraisal of ISA to become cognizant if the price Ecopetrol is offering the country is fair to those assets. We know there is a deficit and fiscal constraints in public finances to fund the national budget. What they are doing is an alternative for financing for the government itself, […] this acquisition is a well-thought-out movement of the Ministry of Finance,” says Díaz.


“We think the purchase ISA for Ecopetrol could be a good deal, as it has electric transmission, a sector of road concessions, and yet another related to ITCs. But these other businesses are alien to the oil and gas, refining, transportation, and hydrocarbon exploration strategy of Ecopetrol. What could happen in the short-term is that it could sell the participation that is not related to the oil industry per se,” he added.
 

Payment process


To finance this Col $14B operation, Ecopetrol would have to sell 8.5% of its assets and become indebted in US$ 1,500 and 2,500M to pay the nation. Law 1118 has existed since 20O6, which allowed the government to sell up to 20% of Ecopetrol, and to date, it has sold 11.5% in shares in 2007 and 2011. Therefore, it is already authorized to sell the rest available.
 

“With the indebtedness, the property of the state over Ecopetrol would be a bit diluted, as it would pass from having 88.5 to 80%. Likewise, the ownership of ISA would also be a bit diluted, as it would only have 41.5% of the shares,” claims the Economist.
 

Mutual benefit


In his concept, “ISA would contribute a stable income, as Ecopetrol is a company which has three business segments: hydrocarbon exploration and production; transportation and refining. The first is totally exposed to oil price variation, the second, income is very stable as rates are regulated by the Ministry of Mines and Energy, and lastly, refining is also exposed to price variation.”
 

In this scenario, ISA would help to complete the second part, “as electric transmission is very stable and would help it stabilize its income. Therefore, in a period of between 2 or 3 years, it would probably sell its affiliates that are not soon akin to its business,” he added.
 

What we will see is the privatization of ISA without fulfilling the steps of Law 226.


“If Ecopetrol is an oil company which explores, transports, and refines and enters the electric transmission market, it matches the business. But the road concession and ITCs are not related to its business and it would lose its focus, in doing so, it could get some cash and de-leverage swiftly, which could be a good deal for them, but not the nation, as it privatized a public asset without complying with the necessary steps, and they do not know how Ecopetrol is going to sell its other affiliates.”
 

A clever play


With this deal, the Government would have cash flow, despite seeing its participation reduced. In this case, those Col $14B would help finance the national debt, which was impacted with the Law of Growth and Financing, as the fiscal expense was increased.


They have always tried to diminish the participation of the nation in strategic assets and return to its regulating role, as these assets end up being a funding source for governments. If they are not well managed, they become a sales asset. “In the Colombian case, it avoids having to engage in a fiscal reform or wait for the effects of it to materialize to use the money,” he added.


The news of the selling of ISA surprised the market because Ecopetrol had presented an investment plan for 2021 in December with values between US $3,500 and $4,000M, but it did not include the acquisition of companies or another electric company, mergers, or acquisitions.


“It is surprising that for the end of January it said it had been assessing it for some time, which sheds light over the influence of the Ministry of Finance to carry out the transaction,” said Díaz.

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