Inside Mexico: Mexico's strength
<a href=www.upi.com>Source By Ian Campbell UPI Chief Economics Correspondent From the Business & Economics Desk Published 3/27/2003 6:09 PM
QUERETARO, Mexico, March 27 (UPI) -- What's in a name? Quite a bit.
"Pemex is the strength of Mexico. Pemex has Mexico in its name. Pemex is future for Mexico." Night after night, these phrases can be heard on Mexican television. The value of Pemex, the state-run oil company, is drummed into Mexicans with Goebbels-like repetition, and with about as much regard for the truth.
Pemex is big and does make a big contribution to the Mexican economy. But it ought to do much more. Mexico's oil wealth is being squandered in corruption and incompetence -- mainly corruption. As yet, President Vicente Fox, the president of change, has not been able to bring much of it to Pemex.
Oil is at the heart of the economy. Pemex is the world's fifth-biggest oil company, and Mexico, in 2002, was the world's fourth-largest producer of crude oil. And next door to Mexico is the world's biggest consumer of oil and natural gas; a country, moreover, that would love to get more of its energy from the Western Hemisphere and less of it from less than stable states in a certain other part of the world.
How convenient! What an opportunity! The fuel should flow out of the Mexico and the money should flow in, fueling Mexico's economy. But no. At present Mexico imports natural gas and gasoline from the United States. The opportunity is being squandered. For a poor country, that is criminal. And much of the reason has to do with criminality.
A key to earnings -- a country's, a company's, a person's -- is to add value. When Mexico sells unprocessed crude oil and imports gasoline it is throwing value-added, productive employment and profit away. Why does this happen? Because Pemex has not built the necessary refining capacity.
"Despite having sizable crude oil reserves," the U.S. government's Energy Information Agency writes, "Mexico's insufficient refining capacity compels the country to import petroleum products. In 2000, Mexico imported 448,000 barrels per day of petroleum products, accounting for approximately 22 percent of total consumption."
It is a staggering failure. Nor do Mexicans (like Venezuelans) enjoy access to cheap gasoline. On the contrary it costs more than twice as much as in the United States.
"Pemex is future for Mexico," as we wrote above, is one of the company's slogans yet it is not providing for the future. The company's latest estimate of proven reserves shows a big fall. It warns that there is a risk of output falling in coming years unless there is more investment.
It complains it lacks the funds to invest, saying it hands over too much to the government: funds that make up about one-third of government revenues. This contribution to government finances is extraordinarily high -- and vital to the government in a country that largely fails to collect income tax. But Pemex cannot blame all its financial problems on the government. There is also the question of the money lost within Pemex's less than pretty web.
According to the U.S. Department of Energy, "Pemex, with its workforce of 139,000, employs three and a half times as many people as does Venezuela's PdVSA, to produce only slightly more oil and gas."
What the overmanning points to is huge inefficiency, the waste of Mexico's oil wealth in unproductive employment.
And the problem is worse than that. The overmanning is a reflection of lax management and of excessive trade union power. According to George Philip of the London School of Economics, "The unions are too political and the accounting system is too weak." Philip says, "The result is corruption, as we can see from Pemexgate, for example."
Pemexgate is a corruption scandal that might be seen as an iceberg: a relatively small crime that is an indication of a vast body of crime hidden beneath the surface. The accusation being made is that Pemex's former top executives, some of them now on the run, and leaders of the oil workers' union -- some of whom, astonishingly, are also Partido Revolucionario Institucional politicians -- diverted funds from Pemex to the electoral campaign of Francisco Labastida, the PRI presidential candidate in 2000, who was beaten by Vicente Fox, now Mexico's president. Two weeks ago the Federal Electoral Institute fined the PRI $90 million for allegedly using these funds.
What is Fox, the president of change, doing about all these problems? So far, Pemexgate might be called his greatest success. Corruption was exposed and slow steps are being taken to punish those responsible. Accountability: It is vital, and is only beginning to be enforced, though at the top, which is where reform must begin. But other steps are proving hard to make. Mexico's vast inertia stands in their way.
According to Juan Rosellón of the CIDE research school in Mexico City, Fox "tried to create a new Pemex board that included several members of the private sector and tried to introduce more private participation in the natural gas sector. Both attempts were blocked by the Congress."
In the Congress, the PRI is still strong. It has also sought to shield the union members that the government would like to prosecute, labeling that effort a politically minded attack rather than an attempt to punish theft.
Fox's other big initiative is to involve the private sector more in oil production and distribution. The idea is that Pemex's ownership of oil fields is preserved but private companies compete to provide an enhanced range of services to the state company under Multiple Service Contracts. But in 2002 both the Mexican Congress and investors received the prototype MSC put forward by Fox less than warmly.
Progress, then, is slow. Was it a mistake ever to have nationalized the U.S. and U.K. oil companies in 1938, thereby creating the Pemex monolith? Both Rosellón and Philip feel the nationalization was right in its time. According to Philip, "It made excellent sense to nationalize the oil industry, but the main reason for doing so was political. The oil companies were clearly trying to play a part in Mexican politics."
Rosellón and Philip also share the view that privatization is impossible at present. Political opposition is too strong. President Lázaro Cárdenas's nationalizing coup of 1938 is still a landmark for Mexicans, an assertion of the nation's independence and identity. Pemex is not going to be swept away, it can only be reformed piece by piece.
For Rosellón, the privatization of Telmex, the dominant Mexican phone company, shows that privatization may not offer a quick solution. The key for him is less dramatic, more systematic: "regulatory reform, production incentives, efficient industrial organization, vertical desegregation of the industry."
Another area where progress may be possible is natural gas, which is vital for Mexico's own industrial development and might be a lucrative export to the United States where it has become the fuel of choice, particularly in homes, because of its clean-burning properties. Since 1995 the government has permitted some private participation downstream in the natural gas industry. This has helped to attract, according to Rosellón, about $1 billion into distribution projects. But it has not been successful, he says, "in promoting increments in production and more competition in marketing activities." This is a challenge that the government and its regulators must address, overcoming, if they can, the political obstacles.
The struggle goes on, less than briskly, less than noisily. The obstacles are such that Fox is pursuing his goals less than publicly. The oil workers' union is powerful and allied with the also-still-powerful PRI. And the resistance goes still deeper, down to the man on the street, and to that name itself: Pemex.
To most Mexicans it means the oil is theirs, not the gringos' -- even if, for decades, Pemex's wealth has been shared liberally among few hands.
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(Inside Mexico is a weekly column in which our international economics correspondent reflects on the country in which he lives part of the time. Comments to icampbell@upi.com.)