State control and trust companies

State control and trust companies

In October 2017, the Office of the Comptroller General of the Republic (CGR) condemned officials of the UAESP for alleged patrimonial detriment and also punished, on the basis of “joint liability,” four 
cleaning service concessionaires and the Fiduciaria Bancolombia.

In the latter case, the CGR concluded that the fiduciary had used surplus cleaning fees for hypothetical purposes not established in the laws.

Interestingly, the CGR does not know that Law 45 of 1990 is exhaustive in pointing out the obligations and responsibilities that derive from these fiduciary contracts, which do not include those of “prior control” in charge of them.

It is worth highlighting the systemic financial risks derived from the higher costs that the fiduciary companies would incur if they complied with the expectations of the CGR. We highlight the increase in the assurance regarding the management of public money and, under a somewhat more extreme scenario, the potential retraction of insurers of said business, including everything related to the PPP schemes, so vital for the infrastructure endowment of Colombia.

At the legal level, we should ask ourselves about the implications referred to: i) Is the role of the Fiduciary Societies now to be extended to the area of becoming “fiscal managers”? ii) Where should the responsibilities of the Trust Societies culminate as administrators of public resources? and iii) Where is the “jurisprudence” gained on “principles of legality and legitimate trust” ?. If these concerns are not rightly answered, Colombia risks receding in financial time.

Prospectively, problems related to so-called “incomplete contracts” must be solved, in the presence of asymmetric information. The good news is that work is already underway 
to regulate more precisely the concept of “fiscal responsibility” of Law 610 of 2000.

I. Border of fiscal control a. The constitutional limits of fiscal control As we have already mentioned, the condemnation of the CGR for a supposed patrimonial detriment, adducing a forced “joint and several liability” to financial entities, represents a serious risk of institutional regression. In particular, the CGR argued that a fiduciary had used surpluses from cleaning fees for hypothetical purposes not established by the Water and Sanitation Regulation Commission (CRA) or set forth in the Public Services Law.

Since the issuance of this ruling by the CGR, the environment of “legal and economic insecurity” has worsened in Colombia regarding the role that Trust Societies must play in helping to manage public resources more efficiently and, Above all, to make sure that the resources that pass through this financial vehicle do not deviate from their objective.

It should be remembered that said objective and its legal procedures had previously been established between the fiduciary, as administrator of resources, and the entity that hires it for that purpose. In this last case, the contracting entity of the fiduciary had been the concessionaires by the instruction of the cleaning entity (grantor), under a series of contracts made during the administrations of the mayors Garzón (2004-2007), Moreno (2008-2011 ) and Petro (2012-2016). In particular, these contracts were made as follows: initial trust agreement (October 2003-September 2011); second fiduciary contract (September 2011-March 2012); and third fiduciary contract (March 2012-March 2013).

In other words, the actions of the parties had been previously detailed in a contract, which was mandatory for the parties, and therefore it is surprising that the CGR came to question how well they acted. In particular, the Commercial Code establishes exhaustively the obligation to fulfill the purpose of the contract by the fiduciary (having to direct its activities to the fulfillment of said contractual purpose). In addition, it should be recalled that Law 45 of 1990 is also exhaustive in pointing out the obligations and responsibilities deriving from these contracts for the administration of third-party resources for specific purposes.

As a result of this erratic action of the CGR, there could also be a potential increase in the services of the insurers, given the effect (in the particular case analyzed) of the Bancolombia Group’s Global Policy (the first “security ring” of the financial entities in Colombia). Continuing with these types of files probably implies increases in the costs of premiums or limits on the amounts insured. All this would cause particular damages in the case of the administration of public resources, precisely those that should be most cared for through these fiduciary mechanisms.

In a somewhat more extreme case, a scenario of systemic risk could be configured on the financial sector (the insurer-reinsurers also withdrew from said public business).

At a legal level, the concerns that arise from this are evident, where the following topics stand out:

i) Is the role of the Fiduciary Societies now extending to the area of becoming “fiscal managers”? This role does not seem to derive from the legislation in force, because they can not make decisions different from those established in the fiduciary contract, being simply administrators; In addition, the qualification that 
the CGR apparently wants to give to the fiduciary role of “indirect fiscal manager” is not a category contained in Law 610 of 2000 that currently regulates the principle of “fiscal responsibility”.

In addition, the jurisprudence of previous awards has already highlighted the non-assignability of public responsibilities, as well as the primacy of contractual provisions (as in the case of the award of the Central Trustee vs. the IDU in the lawsuit over the construction of Ciudadela Salitre, see Center for Arbitration and Conciliation of the Chamber of Commerce of Bogotá, 1995). 
ii) Where should the responsibilities of the Fiduciary Societies culminate as administrators of fiscal resources? The legal understanding to date was that these responsibilities were already clearly defined in the respective fiduciary contract entered into. iii) Where is the “jurisprudence” gained during the last 25 years regarding the principles of legality and legitimate trust under fiduciary administration? For all of the above, today this “legitimate trust” is being undermined through the legal insecurity generated by these actions of the CGR.

In other words, the implications of these questions leave in the air the “fiduciary in Colombia” principle: if these legal doubts are not cleared soon and clearly, then Colombia would be retreating in financial time, since the principles would have to be abandoned of “Public-Private Partnership” in the management of public resources through these healthy principles of “fiduciary mandates” b. The principle of “legitimate trust”.

One of the most surprising elements of the ruling of the CGR has to do with the “legal interpretation” that the fiduciary mandate entails a supposed “jointly responsible tax liability of the concessionaires” (already covered by Law, but now with aggravating circumstances of incommensurability in its amounts). In practice, this would entail reviving, through the back door, something expressly prohibited in the 1991 Constitution: “prior control”, which would be institutional nonsense, since it would be transferring “missionary functions” of public entities towards the fiduciary societies.

All this occurs in a somewhat arbitrary legal context since the CGR could not establish as evidence the configuration of elements of fiscal responsibility, or serious fault, at the head of the fiduciary society. In this respect, the facts have been clear: i) there was no real patrimonial detriment to the UAESP; ii) the conclusion is that there was no fraud on the part of the fiduciary company ; and iii) there was no causal link between the previous elements, or any type of fault (see Asofiduciarias and Fasecolda, 2017). c. Financial and insurance risks in Colombia At the economic level, there have also been concerns about the financial sector (with the mentioned aggravation of the increase in insurance premiums). 

In particular, the financial authorities (MHCP, the Bank of the Republic and the Superintendence) should carefully analyze the implications of breaking these Public-Private Partnerships and the distortion that this would entail in 
terms of financial information, which could generate serious problems of “informational asymmetry”.

In the first case, we have already mentioned the important role played by insurers. If the requirement of the CGR were to be generalized to establish the concept of “indirect fiscal management”, with the aggravating factors of solidarity, on the part of the fiduciaries, then the cost of the insurance could rise (given the lack of definition of the limit of the insurable risk).

This could lead to potential effects on the costs of the so-called Global Policy of financial institutions, which is the “first security ring” of these entities. Under a more extreme scenario, the cost of insurance would become unviable (given the lack of definition of the limit of insurable risk). In this case, there would be potential systemic risks on the financial system, as many sectors are facing the dangerous scheme of “self-assurance” (as commented).

In addition, there is the problem of inefficiency and disinformation in the management of public resources. At the end of December 2017, according to Asofiduciarias, the sector managed around $ 481 billion.

Of these, 26% corresponded to public resources ($ 124 billion, 13% of GDP), see Table 1. These assets have been administered through fiduciary contracts that mitigate acts of corruption, a matter of particular importance to the CGR. These contracts for the management of public resources are not limited to the usual Public-Private Partnerships, but extend to: i) social security; ii) the administration of subsidies and public portfolios; and iii) the administration of resources for the collection of taxes, fees, and contributions, among others.

Suppose that, as a result of the failure of the CGR, a retraction in the intention of the fiduciaries to help administer these public resources will be observed in the future and that this manifests itself, say, in a 10% drop in the fiduciary management of resources public (or the provision of services necessary for the development of related activities). Well, this would imply moving to expose about 1.3% of GDP to greater risks of corruption and/or deviation of public resources from the desired objectives and specified in those fiduciary contracts.

Note that this figure is gigantic since it is equivalent to what two “very profitable” tax reforms would leave behind. This risk is particularly high in the case of infrastructure contracts (type 4G), which currently handle close to $ 12 billion (1.3% of GDP).