Paraguay: Privatization Law In Paraguay

The purpose of this update is to provide an overview and description of the most relevant provisions of the new privatization law in Paraguay. Since previous privatizations processes were implemented through specific laws and were not of relevance for they did not involve the main state-owned enterprises (telecoms, water), the new general legislation shall be considered the basis for the present and future privatization processes in Paraguay in the major sectors of the economy.

The 1992 Constitution expressly provides for the transfer of state owned enterprises ("SOE") and other forms of private sector participation in such public companies. Another constitutional provision guarantees competition in the marketplace and the prohibits monopolies.

Law 1615/2000 "On the Reorganization and Transformation of Public Entities and Reform and Modernization of Agencies of the Central Administration" (hereinafter "Law 1615") constitutes the principal legal framework for the transformation of SOEs. Law 1615 establishes a regime prepared to be applicable to all sectors where the private participation is possible. However, to this date privatization has only been authorized with respect to the telephone service company (Antelco), water and sewage company (Corposana) and the national railroad company (Fccal). The inclusion of other SOE´s to the Law 1615 regime requires a law declaring the SOE "privatizable".

Pursuant to Law 1615, the Executive Branch is empowered to privatize the authorized SOEs through the issuance of Decrees during the process. The entity in charge of the privatization is the National Secretariat for the State Reform (SNRE) with rank of a Ministry dependant on the Executive.

Law 1615 establishes the sequence in the steps that must be performed to accomplish the privatization of the SOE: They are, as follows:

1. Intervention of the SOE. The process starts with the declaration of intervention of the SOE, and the appointment of an "intervener".
2. Selection of consultants. After the intervention has been effected the SNRE must select through an international bid the legal consultants (international law firm) that will organize the new enterprise and its transfer to the private sector and the investment bank that will assist the government in the sale or capitalization of the SOE.
3. Initiation of the process. Definition of the legal nature of the new entity. With the assistance of the legal and financial consultants the legal nature of the new entity shall be determined. Various provisions of Law 1615 establish that the new entity shall be one or more stock companies (sociedades anónimas). The participation or absence of the state shall also be determined in this phase.
4. Rules that govern the reorganization and transformation. Pursuant to Law 1615 the rules that will govern the reorganization and transformation shall be established in a Decree of the Executive. The Decrees shall establish: the legal formalities to organize the new legal entity; the By-laws and other corporate elements, including the determination of the percentage of the preferred option established by the Constitution in favor of the workers and providers of the SOEs; the value of the SOE; the stock capital; the value and prize of the shares; the assets transferred to the new entity; the determination of the debts to be discharged; the grace periods; the novations of credits and debts and the decision to release debts and assets. Additionally, Law 1615 determines that the Executive may rule through decrees other matters destined to give the process the required transparency, efficiency and effectiveness.
5. Sale or Capitalization. After the SOE is transformed into a private entity the consultants selected for the sale or capitalization shall advice the government in the sale or capitalization process, that shall be made through a public international bid and conclude with the execution of the corresponding transaction documents between the government and the successful bidder, who will turn to be the legal owner of the majority of the capital stock of the new entity, if it were a sale, or, in the case of a capitalization, of a controlling percentage of the shares.

The purpose of Law 1615 is the reorganization of the central administration agencies (ministries, governmental agencies) and the reorganization and transformation of the SOEs, the latter defined as the conversion into private legal entities that shall be ruled by private law. Reorganization is mainly pursued to improve the efficiency and effectiveness of the SOEs. Once the SOE is reorganized, the transformation shall necessarily follow and conclude with its final sale or capitalization.

Law 1615 establishes that the declaration of a SOE subject to privatization shall be made by law. Only three SOEs have been declared "privatizable": the basic telephone service company (ANTELCO), the water and sewage company (CORPOSANA) and the railroad company (FCCAL). As mentioned, in order for other public companies to be covered by Law 1615 another law is required.

For the purpose of carrying on on the process expeditiously, Law 1615 prescribes that the Executive is empowered and has the duty to issue the necessary decrees to implement the reorganization and transformation processes. The decrees must be issued in accordance with the regulatory framework of the corresponding public service that is provided by the SOE.

The process of reorganization and transformation starts with the decree of intervention, with which the administration and management (administrative, operative, financial and personnel) is transferred and shall depend on the Presidency of the Republic, during the time of the process.

The Decrees that have to be issued during the process are the following:

1. Decree of intervention of the SOE.
2. Decree establishing the legal form of the new legal entity.
3. Decree by which the reorganization and transformation rules are established.
4. Decree by which the rules to determine the financial situation of the SOE, the amount of corporate capital and the value and prize of the shares.
5. Decree by which the legal directives as required by the selected form of legal entity are established.
6. Decree establishing the By-laws, the name, domicile, purpose, corporate capital, direction and control of the activities of the entity.
7. Decree establishing the detailed inventory of assets transferred to the new entity.
8. Decree by which the releases, wait periods and novations of debts and credits are established.
9. Decree by which it is decided to release or not, or to assume or not, part or all of the liabilities of the SOE.
10. Decree establishing the percentage of the shares of stock destined to the preferred option to be exercised by the beneficiaries established in the Art. 111 of the Constitution.
11. All the decrees that have the purpose of giving transparency, efficiency and effectiveness to the process.

The Executive may order the intervention of a SOE for 180 days, renewable for an additional equal term. The intervention entails the cessation of the administration bodies, mainly the council of administration of the SOE.

The intervener shall be appointed by the Executive with the consent of the Senate, and may only be removed by the Executive or by any of the chambers of Congress through the absolute majority of the votes. Once the SOE is transformed the intervener comes to exercise the function of President and sole director of the new entity until the sale of shares or capitalization is accomplished.

The functions of the intervener shall be the same of the substituted administration body according to the laws and other legal instruments that govern such SOE. These functions shall be limited to the administrative management of the entity, and to assure the adequate provision of the SOE´s goods and services, and that the transformation process is duly implemented in a transparent, effective and expeditious manner.

Pursuant to the Constitution the workers and sectors directly involved with the SOE (providers) are entitled to a preferential option of the percentage of shares established in the corresponding decree, and in the form and order prescribed therein. The beneficiaries of this option shall be precluded from disposing of their shares for a 5-year term.

The Executive is empowered to design labor emergency plans to diminish the negative effect over the employment of the affected personnel. These plans may include the voluntary withdrawal, voluntary retirement, transfer of employees to another entity or state company, establishing the rules to that effect.

According to Law 1615 the Executive has the power to proceed with the partial or total sale of the SOE, or its capitalization through the issuance of new shares. The sale shall be effected through an international bidding process.

The minimum prize of the sale shall be fixed by a reasoned Decree of the Executive Branch, and shall be based on the opinion of the selected financial advisors.

The Executive Branch shall not commit the Paraguayan State through avals, guarantees or securities in connection with the sale or capitalization of the SOEs.

The provision of Law 1615 that specifically establishes that the transformation of the SOE shall not derive in the creation or maintenance of any monopoly nor grant any market reserve is very important.

The General Controller of the Republic is the natural entity that shall according to the Constitution and Law 1615 control and audit the reorganization and transformation process. The law prescribes that the General Controller shall exercise the supervision of these processes, effectuate the observations and consultations to the consultants selected pursuant to the law and formulate the proposals and recommendations to the Congress as well as inform of any abnormality detected in the reorganization and transformation processes.

The Law 1615 prescribes that the procedures by the authorities responsible for implementing the privatization process under the law shall be public, as well as the backing information, and shall be available to interested parties, unless those protected by the banking confidentiality rules.

It is important to mention that the Congress reserved for itself the so-called "red button", a mechanism by which if the control entities shall detect relevant irregularities during the transformation and sale process, capable of altering the transparency of the process or causing damage to the State, the same shall be immediately informed to the Presidency of the Congress and if it were before the public international bid for the participation of the private sector in the SOE, with the favorable vote of the absolute majority of its members may retroact the process as of the date the irregularity was committed. If the public international bid was already in process, then such irregularities may only be challenged judicially.

Finally, Law 1615 establishes that the provision of the different public services by the transformed entity shall be under a concession regime that is conferred in advance by the law. A concession contract shall be entered into between the new entity and the Paraguayan State within the six months of the award as successful bidder in accordance with the legal framework applicable for each sector.