TelMex Set to Go Private and Modern

The Mexican government’s plan to privatize Telefonos de Mexico, the giant telecommunications monopoly, with assets of about $4 billion, signals a major advance for the country’s economic rejuvenation. The sale of the government’s 51% interest in TelMex could generate several billion dollars in needed funds and might unleash changes at least as dramatic as those that followed the breakup of AT&T.;

Like the previously privatized Mexicana de Aviacion and the Cananea copper mining complex, TelMex is profitable but woefully inefficient. Dismal communications facilities are a burden to businesses operating in Mexico. As long as services routinely available elsewhere are absent or outrageously priced, new investment capital and restored economic growth will prove elusive. In this context, the privatization of TelMex is part of an ongoing attempt to remedy fundamental problems plaguing the Mexican economy. An ambitious program of deregulation could follow.

To be competitive in the 1990s and beyond, TelMex needs a dramatic infusion of fresh capital to improve its infrastructure and services and to introduce new technologies. Estimates range between $8 billion and $14 billion of new investment if the telecommunications system is to approach world standards by 1994. Stifled by debt and surrounded by economic stagnation, the Mexican government cannot afford to underwrite modernization, yet it cannot hope to attract private domestic or international investment funds without modernization.

There are at least five reasons for Mexican authorities to see privatization as advantageous.

* President Carlos Salinas de Gortari, a Harvard-trained economist/technocrat, has greater faith in the ability of markets to create fair and efficient outcomes than his predecessors had. He is personally committed to promoting the business sector and drastically reducing government involvement in the economy.

* Unless the Salinas administration can attract new capital soon to give the impression of a reviving economy, the government could face disastrous reversals in the 1991 mid-term national elections. New foreign investment dried up after the onset of the debt crisis in August, 1982; and creditor banks would be hostile to massive new government expenditures on telecommunications.

Privatization will generate funds and allow domestic and foreign investors to direct their money as they wish with less fear that the government will redirect incoming cash according to its own short-term priorities. By allowing almost half of TelMex’s shares to be owned by foreigners, the Mexican government will also send a positive message about its new business environment.

* As other countries have discovered, privatization stimulates labor reform, makes unions more accountable and tends to lead to greater flexibility in labor contracts. Private management may be more willing to confront labor than government is. However, because the Mexican government has guaranteed all union jobs, a company involved in privatizing will have to rely mostly on retraining programs and more flexible work rules to improve labor productivity.

* Privatization, particularly when coupled with the introduction of limited competition, would minimize the political exposure of the Salinas government when the inevitable increases in local rates are introduced.

The tremendous prices charged for long-distance calls and the system’s low reliability make Mexico an inhospitable place to do business. Local telephone service now costs about one-seventh the U.S. average, but long-distance prices are three times higher. It can take more than two years and cost more than $2,000 to put in a phone line that, once installed, is frequently out of service. If there is a reduction of cross- subsidies to politically powerful local users, lower domestic long-distance and international rates and improved efficiency, TelMex and Mexico as a whole would benefit.

* The privatization of TelMex shows that Mexico is moving beyond import substitution to establish a more open, efficient economy that can be a regional pace setter. Although the form that international services will take under a newly privatized company is unknown, privatization should make it easier to negotiate the integration of Mexico’s system with the global network. For example, a revision is likely in policies that currently force MCI and US Sprint to deliver their long-distance traffic to Mexico over AT&T;’s circuits.

In addition, if Mexico chooses to allow competition in the provision of international data and advanced voice services, along the lines being adopted by even the more conservative telecommunications authorities in Europe, Mexico could emerge as the regional hub for communication traffic from throughout Latin America and as the leader in the effort to integrate Latin America’s communications systems. Such an arrangement would improve Mexico’s long-term technological position.

During his campaign for the presidency, Carlos Salinas promised that “telecommunications will become the cornerstone of the program to modernize Mexico’s economy.” The privatization of TelMex is a promising start.