For any Mexican public official to propose privatizing PEMEX, the gigantic state-owned oil company, would be as risky as playing tennis with a live grenade. A sacred national symbol, PEMEX is the Mexican equivalent of stuffing Uncle Sam, an apple pie and a bald eagle into one volatile package.
Created in 1938, PEMEX (for Petroleos Mexicanos) also symbolizes all that is wrong with the country’s traditional economy and political system–corruption, inefficiency and cronyism.
President Vicente Fox has hinted he’d like to modernize PEMEX but any mention of the “P” word, as in “privatization,” sets off a national uproar. Nevertheless, he has gone where no previous presidents have dared, by naming four private-sector executives to the board of PEMEX (union members hold five of the eleven seats) with the mandate to make the company “more entrepreneurial.” He has promised to seek foreign participation in some PEMEX operations.
To the extent Fox may succeed in rationalizing PEMEX operations, it may be a contribution to Mexico’s economic and political development comparable to his defeat of the ruling Revolutionary Institutional Party, or PRI, after 71 uninterrupted years in power.
The PEMEX monopoly reports about $46 billion a year in revenues, making it one of the largest companies in the world. One sixth of U.S. oil imports come from PEMEX. Taxes on PEMEX profits pay for one-third of all government expenses. Its unionized workforce of approximately 135,000 has faithfully funded the PRI, creating a political juggernaut whose overriding interest was preserving the status quo.
In a scandal that may help Fox’s hand in cleaning up PEMEX, last month government investigators alleged that about $120 million of company funds had been diverted into the PRI’s unsuccessful presidential campaign against Fox.
That money barely would have been a down payment on PEMEX’s enormous capital needs to modernize. Company officials say it needs about $4.5 billion a year for the next decade, just to modernize operations.
PEMEX’s inefficiency and waste are legend. The company employs about twice as many employees per barrel of oil pumped as privately owned operations in other countries. The billions that are wasted through inefficiency–or squeezed out by a government loath to increase taxes in other areas–could have paid for the needed upgrades and modernization of PEMEX.
Instead, breakdowns–caused by poor maintenance and antiquated equipment–routinely lead to spills and contamination. So short in capital is PEMEX that Mexico has to import about one-fourth of its gasoline because there is no money to build additional refineries.
Fox’s efforts to bring PEMEX into the 21st Century will meet with intense opposition, from the unions and the PRI, who will no doubt accuse him of trying to pawn Mexico’s crown jewel. But without massive amounts of foreign investment, PEMEX’s productivity–and ultimate value to Mexico–undoubtedly will decline.
It will be a battle against nostalgia and special interests, but it presents a great opportunity to help the Mexican economy. We wish Fox the best.
