The time is now for full privatization of Pemex.

• Author: Russell, J. Keith
• Position: Mexican oil industry

1. INTRODUCTION

   During the administration of former President Carlos Salinas, a series of far-reaching free market reforms were implemented throughout the Mexican economy.(1) However, the Mexican oil industry has been largely excluded from privatization efforts.(2) Petroleos Mexicanos, or Pemex, was formed in 1938(3) when then President Lazaro Cardenas expropriated and nationalized the foreign-dominated oil fields, consolidating all petroleum operations into one state-owned enterprise.(4)

   An oft-advanced explanation for the failure to include Pemex in privatization efforts is Article 27 of the Mexican Constitution which grants control over the petroleum industry to the state.(5) Some efforts have been made recently to achieve a measure of privatization of Pemex; for example, the Mexican government has recently agreed to sell up to 49% ownership in Mexico's 61 petrochemical plants with the state retaining 51% ownership.(6) But the Mexican government has continued to resist completely relinquishing control over this politically profitable,(7) but economically volatile industry.(8)

2. PRIVATIZATION HAS BEEN SUCCESSFUL ELSEWHERE IN LATIN AMERICA

   1. Overview of Other Latin American Privatizations

      Several definitions have been advanced for the concept of privatization.(9) A good, general definition is "the transfer of asset ownership from the government to the private sector" in an attempt to remove from political considerations "the commercial, financial, and strategic decisions of the business."(10) The worldwide pace of privatization, especially in developing countries, is rapidly increasing.(11) In Latin America alone, 694 divestitures have resulted in over US$59 billion in revenue for these developing countries, a figure that represents more than half of the total revenue from such transactions in all developing countries world-wide.(12) Privatization in the developing world has been praised as a means of establishing a government's commitment to liberalization,(13) as well as promoting economic development and modernization.(14)

      The scope of privatization, however, has not always extended to state-owned petroleum enterprises.(15) While several countries have formulated pre-privatization policies for state-owned petroleum enterprises, this sector has remained largely immune from the privatization trend.(16) However, the benefits of privatization are themselves creating pressures to complete the privatization movement by freeing the state-owned petroleum enterprises.(17) For example, international investors demanding the break-up of state monopolies before engaging in business have developed a major natural gas project in Brazil and Bolivia.(18) By selling off their often dilapidated oil refineries and gas plants, these governments hope to attract much needed private investment capital to improve the quality of services.(19)

      Another example of Latin American success with privatization is found in the policies of Chile.(20) In addition to privatizing many of its state-owned enterprises, the Chilean government implemented free market economic principles through reduced import tariffs and the elimination of both subsidies and price controls.(21) As a result, the average rate of growth for the national gross domestic product was 7.1% from 1975 to 1981,(22) and with a government committed to the continuance of free market reforms, the average has continued at over 5% from 1985-1996.(23) An additional benefit to Chile has been entry into a trade and investment agreement with the United States(24) and the probable accession of Chile into the framework of the North American Free Trade Agreement (NAFTA)(25) or other free trade agreements.(26)

      Latin America has become recognized as the fastest growing regional market for exports from the United States.(27) As a result, the Enterprise for the Americas Initiative (EAI)(28) has been formed to encourage the further liberalization of Latin American economies.(29) Latin American countries that institute free market reforms are rewarded by the EAI with loans, investment programs, and opportunities to join trade agreements.(30) These positive reinforcement measures are designed to counteract the destructive effect of nationalist resistance to foreign influences, such as capital investment.(31) But resistance to the foreigner may also eliminate much needed foreign investment capital.(32) This can, in turn, create an economic crisis that may ultimately only be resolved by turning again to foreign capital sources.(33)

   2. Argentina's Successful Privatization Experience

      By the end of the 1980s, the government of Argentina controlled over 25% of the country's gross domestic product,(34) and the state employed 20% of the total national labor force.(35) By 1989 these state-owned enterprises were incurring huge budget deficits and suffering from inept management.(36) The government, saddled with enormous budget deficits.(37) was also unable to make necessary new investments for modernizing the country's infrastructure.(38) Absent timely and reliable capital investment from the central government, performance could only fall among state-owned firms in these sectors.(39)

      Amid hyperinflation,(40) and strong political pressure from the government workers' unions to perpetuate the state-dominated situation,(41) President Carlos Menem assumed office in July 1989.(42) Because President Menem had not advocated any liberalization of the economy as a candidate for president, and because he was dependent upon the support of the government workers' unions for his election,(43) it was not expected that he would pursue privatization policies as president.(44) However, shortly after assuming office, President Menem issued a warning to the Argentine people to prepare for "`major surgery without anesthesia,'"(45) and directed the enactment of legislation that gave him the authority to begin privatizing the economy.(46) Within the following three-year period, the privatization process was largely completed,(47) and a capitalist, free market economy had been formed.(48)

      The preferred method of privatization in Argentina has been the outright sale of the state-owned enterprise to private investors who immediately assume control of the venture.(49) Importantly, the oil companies in Argentina were not excluded from privatization efforts.(50) By 1991, sales of state-owned enterprises resulted in US$4.6 billion in revenues, and an additional US$7.1 billion in debt conversion.(51)

      The state's monopoly in the oil industry was methodically eliminated through a course of action that began with a presidential decree that privatized all secondary marginal-production areas and private companies the option to join as partners with the state-owned YPF oil company in the remaining primary areas.(52) Crude oil extracted from primary and secondary areas was decreed freely marketable, and export duties as well as foreign exchange remittances were removed.(53) Government price controls were likewise eliminated, allowing oil prices to be determined by free market forces.(54) Finally, in 1991, President Menem implemented the Argentina Plan, which removed the remaining obstacles to full private exploitation of oil and gas reserves.(55)

      Argentina's national oil company, YPF, was fully privatized by June of 1993.(56) The sale of YPF was the first divestiture of a national oil company by a Latin American country.(57) The privatization of YPF stands as a sterling example of how free market reforms can increase productivity and profitability while enhancing overall economic welfare.(58) Although employment in the new private companies was initially cut by 90%, it is now growing efficiently with 130 new upstream businesses.(59) In addition to converting a large portion of the public's automobiles to natural gas, the Argentine economy has also benefited from increased sales transactions such as purchases of oil tools from American companies for YPF use.(60)

      Argentina's privatization process was successful because it was implemented as part of an overall market reform process.(61) Specifically, four main areas were stressed to ensure the success of the privatization process.(62) First, foreign law firms with expertise in the legal transactions necessary to the process were consulted to plan the legal framework necessary for selling the state-owned enterprises.(63) Second, the government pursued a policy of swift, outright sales whenever possible, and granted concessions when outright sale was either prohibited by law or otherwise unattainable.(64) Third, the government ensured that potential investors, including foreign investors, were financially solvent and possessed the technical ability to assume control of the enterprise before allowing the transfer to go forward.(65) Finally, the government implemented a series of measures to ensure that the former government workers were not unduly jeopardized in the transition.(66) By implementing this principled procedure to guide the sale of state-owned enterprises, Argentina ultimately realized an astonishing drop in its inflation rate from 1,400% in 1990 to only 6% in 1993.(67)

   3. Why Privatization Is a Preferred Economic Policy

      There are many reasons why a government would want to privatize state-owned enterprises. Private ownership may be ideologically preferred.(68) or it may simply be a means of reducing the public debt that is routinely incurred by operating state-owned enterprises.(69) Privatization may also be founded upon the assumption that a privatized firm will operate more efficiently.(70) Economically, privatization is desirable because a private enterprise functioning in a competitive environment will be compelled to make better use of scarce resources to achieve efficiency.(71) This efficiency standard, in effect, gauges the nation's economic welfare.(72)

      Privatization of state-owned enterprises can also be a way to attract the investment capital and trained...