Loan Sharks and Fat Cats Bankrupt Colombia
Here in the middle class, most of us grew up with our brains full of folksy wisdom about money. “A penny saved is a penny earned,” and “Neither a borrower nor a lender be.” Or–less poetically–if for some ill-advised reason, you have to a borrower be, you are going to have to pay back all the money you got, plus a bit more.
It turns out these pithy fiscal guidelines are not strictly true. Not for rich people who borrow from the World Bank and the Inter-American Development Bank (IDB); they can make poor people pay the money back, plus a lot more, to other rich people like themselves.
The World Bank and the IDB–because they are banks–actually encourage rich people who run poor countries to be borrowers. The jumbo loans from the jumbo banks help explain why there are such rich people in such poor countries. In Colombia, for example, the World Bank and the IDB lent the government $25 million to, as they put it, support the privatization process and regulate concessions to operate services in the energy, transport, telecommunications, and water and sanitation sectors. Specifically their money would “consolidate the applicable regulatory framework in each of these sectors, improve public sector capacity for administering concessions and private operations… and identify and promote specific projects that will help to facilitate and expand this process in the future.”
Do what now?
Among the sectors and enterprises to be assisted by the Banks was the Electrificadora del Atlantico (Electranta), the power company on Colombia’s Atlantic coast. Along came William Tarut, a U.S.-educated engineer from Barranquilla who, he told the Bogotá daily paper El Tiempo, wanted to make some money. In 1992, he had intended to make money more or less conventionally by building a generating plant to supply Electranta. Colombia had just come through an energy-rationing crisis that made California’s current problems look like not much more than a spent fuse. Enterprisingly, Tarut created Electrotar, cleverly named for electricity and himself, bought about 600 acres next to Electranta, and started to look for capital. Executives from Electranta bought in and so did the King Ranch.
Months passed and the plan lost its appeal. The ranch people withdrew from the scheme. Corelca, another generating company with a real plant, plugs, wires and everything, began to oppose Tarut’s plans. Making money was turning out to be harder than he thought, so like able small businessmen everywhere, Mr. Tarut found himself some big businessmen. He contacted Sithe Energy, one of the world’s larger energy companies, which tells clients that “the energy business today demands new abilities, talent and resources.” The talent and abilities required, it seems, have more to do with political power generation than with electrical.
This being the case, Mr. Tarut looked up his old friend from Club El Country in Barranquilla, David Name, brother of the Senator from the Atlantic coast, Jaime Name. Brother Jaime at the time was usefully situated on the Fifth Senate Commission in Colombia, responsible for electrical affairs. Tarut has now admitted that he paid David Name’s company, Development Consultants, about $25,000, but, he never requested any help from Brother Jaime. “I know him very little,” he told El Tiempo. “I’m not a political man.”
This is a fact. Mr. Tarut is strictly Homo economicus. But Brother Jaime helped pass Law No. 142, the Public Service Law, in 1994, breathing new life into Mr. Tarut’s faltering enterprise. Article 18 allowed companies providing public services–such as Corelca–to participate as partners with private companies providing these same services, such as Electrotar. Public companies were also now permitted to join with other national and international interests to form consortia for privatization purposes. In approving the law’s passage, Jaime Name told the Colombian Senate that he and his colleagues on the Fifth Commission had passed an energy law introducing social guarantees to protect residential users and increase coverage.
With this encouraging development, Mr. Tarut compulsively formed another company, Co-energía, made up of himself, and Electrotar, also made up of himself, now with a couple of other partners, including Sithe Energy.
These two provided capital to buy into Corelca, a partner in Electranta. All together now, Mr. Tarut owned Electrotar, which owned Coenergía (with capital from Sithe), which owned Corelca, which owned Electranta, which had a captive market of Colombian electricity users on the Atlantic coast.
In 1996, amidst popping corks and firecrackers, a new energy company was born: Rio Inc. Who, you might ask, owned Rio Inc? Electranta, with a 49-percent interest, Coenergía with 49 percent, Mr. Tarut with 1 percent, and Mr. Tarut’s friend, Ivan Lewis, with 1 percent. Because Mr. Tarut controlled Coenergía, together with Sithe, and he and Mr. Lewis effectively controlled 51 percent of Rio Inc., or the supply and the market for electricity on the Atlantic Coast of Colombia. This was not bad for someone who started out without much more than 600 acres of unattractive real estate, and who, in the intervening four years, never actually made or sold anything of any use to anyone.
Unhappily, this transaction was visibly crooked, so our boys bribed the appropriate Minister, Rodrigo Villamizar. The Minister needed money; he had just been obliged to resign from the government of Ernesto Samper (Remember him? He bought the Colombian presidency with cocaine money.) for selling public radio frequencies and keeping all the money. So Mr. Minister collected a consulting contract from Rio Inc. for an undisclosed sum to explore the viability of finding gas in Venezuela.
Rio Inc. then split into TermoRio to produce electricity, and Rio Gen to sell it, for–praise the Lord–legal reasons. Nevertheless, both companies were owned by the same consortium and by Mr. Tarut. In 1997, one year after the IDB lent $25 million to the Colombian government to teach it how to avoid this sort of thing, the general manager of Electranta, a Mr. Antonio Holguín, awarded an exclusive 20 year and 6 month contract to TermoRio to supply Electranta with electricity. Mr. Holguín, whom Colombian newspapers describe as “flamboyant,” is now a fugitive from justice, such as it is, for another unrelated matter, which we cannot possibly go into here. Although his grasp of the law in general seemed sketchy, he was well-enough informed–or else well-enough advised–to write an airtight contract for TermoRio. When the Finance Minister saw the deal, he called Mr. Holguín expressly to say he was not authorized to sign such contracts.
Unfortunately, a judge on the Atlantic Supreme Court ruled that the Government of Colombia, in not honoring the contract, was legally liable to the TermoRio energy consortium for the amount of $65 million. TermoRio is including in its judgment request the amount it paid to bribe the Minister. Somehow, this doesn’t seem quite fair. Of course, TermoRio probably bribed the judge who found in its favor, too, but at least it didn’t include this amount as an identifiable line item in its calculated damages. In recent developments, evidence has surfaced suggesting that TermoRio also suborned the legal team representing the interests of Colombia to provide a less than zealous defense in the court case; this, too, was probably expensive.
All in all, this whole transaction has cost the Government of Colombia a lot of money, when you figure in what has already been paid to TermoRio, the amount of the judgment, plus the amount of the loan to be paid back to the IDB for teaching everyone how to establish a regulatory framework to prevent deals like this. Somewhere in the neighborhood of $90 million. When the Finance Minister asked Mr. Holguín how he could have signed such a monster contract with–essentially–Mr. Tarut and his nested companies, Mr. Holguín explained that he missed the classes on privatization and the capitalization of public enterprises. Our question: For $25 million, weren’t the Banks taking attendance?
Apparently not, because this sort of leveraging scheme should not be that difficult to spot, especially if you’ve got help from the crack international experts we’ve come to associate with the Banks. After all, there are two common threads between Rio Gen, TermoRio, Rio Inc, and Coenergía: the same owners and the same office. All are headquartered in a single suite with a lovely conference room and two secretaries in a luxury office building in Barranquilla.
Nevertheless, the IDB and the World Bank missed it. We don’t mean to pry, but we can’t help wondering what the experts were really doing. According to their loan agreement, they were designing “models of the contracts that would be subsequently awarded.” So maybe the idea for a 20-year-plus exclusive electricity-providing contract to two secretaries and a conference room was the IDB’s idea. The IDB and World Bank management team was also responsible for “support for separation of energy generation from transmission and distribution functions in the Corporación Eléctrica de la Costa Atlántica (Corelca), and the sale of assets in regional generators.” Once this was efficiently accomplished, the consultants could turn to the “Development of new contractual instruments for wholesale marketing of energy, criteria for uncertainty and risk coverage, operating regulations for the energy exchange, and future markets.” God help us all.
You could buy quite a lot of electrical stuff for $90 million. You could get your shack wired up so you didn’t have to boil water to wash your clothes, for example. Too bad. If you’re Colombian, your public funds will go for that huge legal judgment to a made-up company that probably doesn’t know its amps from third base. Meanwhile, the IDB is industriously planning more financial assistance for your benefit. The Sectoral Program for Fiscal Reform is coming soon for unspecified millions. According to the IDB, the loan will “promote a culture of fiscal responsibility.” This sounds like a marketing niche for Responsables, Inc., and possibly for Cultura Moral, both wholly-owned subsidiaries of RioCorrupto, prudently headquartered on a late model Chris Craft somewhere off the Caribbean coast.
Gabriela Bocagrande paid attention during the classes on privatization and the capitalization of public enterprises.