Colombia started in 1991 a process called apertura economica, according to changes introduced in the National Constitution and in the outdated rules on foreign investment and exchange controls. Amendments were also introduced in the trade regulations, including the participation of the country in new free trade zones like the G-3 and the continuation of the trade liberalization policies.

The country's economy reacted very favorably to the apertura, achieving growth rates of 5% and 6% year after year, despite domestic political problems.

However, the apertura also made it notorious that the country did not have either the infrastructure nor the services required by high economic growth rates. The country urgently required new power generating plants, a system of distribution of natural gas throughout the country and in the large cities, new and better roads, bridges and seaports, airports, public services such as water and sewage, and telecommunications (in the form of competition in the national and international long distance services) and improved services of the financial sector.

In order to invite foreign and national investors and contractors to take over sate owned entities and to carry out the large infrastructure projects required to maintain and increase economic growth, the Government submitted to Congress a bill in 1995, to regulate privatizations which was passed as Law 226 of December 20, 1995. Law 226 complemented provisions issued in 1993 regarding privatization of state owned financial entities.

The main purposes sought through the privatizations plan are, according to the Ministry of Finance and Public Credit:

"...(i) to increase the efficiency in the production of goods and in the rendering of services, as well as allowing the state to specialize in carrying out its basic functions, (ii) the promotion of the capital markets and the democratization of the property, and (iii) increasing the revenues of the state, in order to finance several investments of the Development Plan, facilitating the concentration of public resources in areas designated as priority sectors, specially in the social sector." (see endnote 1)

This note is a summary of Law 226 of 1995, starting with a reference to the National Constitution.

Article 60 of the Colombian Constitution is the basic legal provision according to which privatizations in Colombia are permitted:

"The State will promote, in accordance with the law, access to private property. varied, as summarized below.

1. GENERAL PRINCIPLES

This law contains the general principles which will guide the process of privatizations in the country:

1.1 Democratization: under this principle, it is guaranteed that all individuals and legal entities may have access to equity the State may sell, in such a way that the processes to carry out the sale will include mechanisms to guarantee wide publicity and free competition.

Law 80 of 1993 (Statute of Administrative Contracts) does not apply to the privatization of state owned entities. The privatizations are only subject to the rules of Law 226 and to other applicable private law rules.

1.2 Preference: the law provides that in order to guarantee effective access to Sate owned property, special conditions will be granted, with the purpose of facilitating the acquisition of the state equity to the workers, workers organizations, pension funds and similar entities (the so called 'solidary sector' of the economy).

The democratization of the state property, through preferential access to such property by the workers, pension funds and similar organizations, is the express recognition required by the National Constitution of the solidary sector of the economy, as required by the Constitutional Court (see endnote 2).

1.3 Protection of the public patrimony: the existence of a public patrimony cannot be disregarded. The sales authorized by the law cannot prejudice the public patrimony.

Therefore, the law established that the sale of equity in state owned property does not imply that goods belonging to the historic and cultural patrimony of the state will be sold, such as rights on philanthropic foundations or on works of art, or on goods belonging to the historic or cultural patrimony of the country.

1.4 Continuity of the service: taking into account that the state is the owner of many entities which render public services, the privatizations law also seeks to protect the continuity in the rendering of these public services, defined (see endnote 3) as organized activities that tend to satisfy general interest needs in a regular and continuous way.

2. COVERAGE OF THE LAW

The law will be applicable to all the sales, total or partial, to private sector purchasers, of shares or convertible bonds owned by the state and in general to its participation in the equity of any undertaking.

It is considered there is ownership by the state if there are any public entities, or any legal entities of which the former are part, which are owners of interests in the entities that will be sold. The public interest may also exist if the interests were acquired with public source funds or with funds belonging to the public treasury.

3. PROCEDURE TO MAKE THE SALE

3.1. The Ministry of the respective sector and the Ministry of Finance, will submit a DRAFT SALE PLAN to the Council of Ministers.

3.2. The Plan is sent to the Government for approval once it has the favorable opinion of the Council of Ministers.

3.3. The annual privatization plan will be presented to Congress for its knowledge within the first 60 working days of the year.

In compliance with the above procedure, the Ministry of Finance and Public Credit must submit to Congress, within the two months following the publication of Law 226, a list of all the state owned entities that go through a difficult economic situation.

4. MEASURES TO GUARANTEE DEMOCRATIZATION OF EQUITY PARTICIPATION IN DIVESTED STATE OWNED ENTITIES

The sale of equity shall be made using mechanisms that take into account publicity and competition conditions. In order to achieve democratic participation, the law provides for criminal and other penalties to those that may infringe on the provisions established by law, particularly if preference is not accorded to the groups above referred to as the 'solidary sector.'

5. STATE OWNED ENTITIES, TERRITORIAL ENTITIES, AND DECENTRALIZED ENTITIES.

When the sale of equity is made among state bodies, law 226 is not applicable, giving way to the more specialized administrative contracting rules.

When the sale corresponds to the territorial and decentralized entities, law 226 is applicable, with the adaptations required by the organization and conditions of each type of entities.

There are as well special conditions for the sale of state interests in certain organizations such as the Fund of Guarantees of Financial Institutions and Insurance Entities, in which case the provisions of the Financial System Organic Statute will apply.

ENDNOTES

1. Speech of the Minister of Finance and Public Credit before the Senate on June 6, 1995.
2. Judgment C37 dated February 3 1994, Constitutional Court.
3. Decree 753 of 1956.

This report was prepared and is copyrighted in 1998 by PARRA, RODRIGUEZ, CAVELIER, a law firm with offices in Santa Fe de Bogota, Colombia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.