Mexico Going ‘Private’ to Fund Roads, Ports, Phones

For a country with a virtually empty treasury, Mexico has ambitious plans.

By the time his term ends in 1995, President Carlos Salinas de Gortari has promised 2,400 miles of new, four-lane highways and bridges, a $10-billion overhaul of the antiquated telephone system and increased spending on social services.

So how does the Harvard-educated economist expect to pay for this? A big part of the answer is privatization--handing over major parts of the economy to private enterprise.

Salinas and his predecessor, Miguel de la Madrid, have cut the number of state-owned companies to 746 from the 1,155 there were in 1983. Another 344 are slated for divestiture--either by sale, liquidation or gift.

As a turn-around strategy for corporations, the plan is classic: Spin off peripheral subsidiaries and invest the money from the sales in the core business.

The question is whether the strategy can work for a nation like Mexico, where a system of state economic dominance has assured political stability. That system has been in place as long as Eastern Europe was Communist.

Salinas has made some adjustments.

To ensure adequate investment in the divested companies, sales agreements often are conditioned on buyers’ commitments to modernize plants and equipment that the financially strapped government has neglected.

Besides selling off companies, the government is taking bids from corporations to build toll roads, ports, thermoelectric plants and cellular telephone systems, public projects that previous Mexican administrations would have undertaken themselves.

Corporations finance the projects and operate them long enough to recover their costs and turn a profit--by charging tolls, for instance, in the case of roads. Afterward, they will turn the projects over to the government.

Early results are positive.

A badly needed bridge is under construction between El Paso, Tex., and the neighboring Mexican city of Ciudad Juarez. Roads are being built between the industrial centers of Monterrey and Nuevo Leon in the north as well as between the resorts of Cuernavaca and Acapulco in central Mexico.

Government subsidies to state-owned companies fell to less than $500 million in 1989, contrasted with $5.4 billion in 1982.

That has freed money for other uses. This year, for example, the federal budget for education increased--after adjustment for inflation--for the first time in eight years.

The sales have also permitted better economies of scale, supporting the country’s export drive.

The Monterrey-based Alfa Group, one of Mexico’s largest industrial conglomerates, was able to consolidate marketing and administrative operations after buying a state-owned company that makes ingredients used to manufacture synthetic cloth. The acquisition complemented plants that Alfa already owned, said Juan Morales Doria, executive vice president of the corporation.

Even the union leaders in some state-owned companies see a positive side to privatization. The leader of workers at Telefonos de Mexico has called for rapid privatization of the government-owned telephone company. Meanwhile, the head of the oil workers union has said the petrochemical industry needs private investment in order to modernize.

Nevertheless, there are concerns about the long-term consequences of privatization. They range from fears that the soundest companies are being sold, leaving the weakest to founder, to outright skepticism about the motives behind the sales.

Underlying such worries are questions about how far the government will go in privatizing industry and about what will be left of the implicit economic and social pacts that have kept Mexico stable.

At the heart of these pacts was an economic system that Mexicans call state capitalism. That system made the government responsible for the bulk of Mexico’s investment capital, providing not just roads and schools but also raw materials at subsidized prices for domestic manufacturers.

For 30 years after World War II, the system seemed to work. The economy grew at an average rate of 6% a year. However, fiscal deficits also grew as the government absorbed failing companies to save jobs and assure continued domestic production of everything from buses to refrigerators.

A decade ago, the government tried to cover these deficits by exporting oil from the state-owned petroleum monopoly, then by taking out billions of dollars in foreign loans.

The effort backfired. Plummeting oil prices and soaring interest rates increased the deficits as the government struggled to keep up debt payments. There was no money to buy planes for the government’s two commercial airlines or new equipment for the 64 state-owned sugar mills.

That forced Mexico’s leaders to re-examine the country’s economic strategy.

Encouraged by its creditors, Mexico opted to give private enterprise a greater role in the economy.

De la Madrid, who was president then, scrapped plans for 80 new state companies that existed in name only. Special funds that provided low-interest loans for everything from financing roads and bridges in border areas to promoting manufactured exports were abolished and their functions taken over by state development agencies.

Meanwhile, the sales and liquidations began. By early 1986, the government had put 172 companies--from hotels to auto parts makers--up for sale.

At that time, the government said that the telephone company, airlines, steel mills, food-processing plants and a state-subsidized grocery chain were strategic and would remain in government hands. Since then, the airlines and at least one of the food-processing plants have been sold.

The telephone company and grocery stores were among the 66 companies targeted for sale at the beginning of this year. Last month, the names of two major steel mills and all state-owned mining interests were added to the for-sale list.

Today, the industries that remain strategic--untouchable, not for sale--are electric power, banking, oil and basic petrochemicals. But as more companies are sold, rumors persist that even parts of these industries will eventually go on the auction block.

These concerns about the future exacerbate present worries that the government has sold larger, profitable or easily restructured companies, while smaller, troubled state companies have languished without buyers.

Government officials partially addressed that concern last month by announcing plans to package the small companies in groups for sale to venture capitalists.

Not everyone in Mexico accepts the government’s strategy.

Cuauhtemoc Cardenas, Salinas’ strongest opponent in the 1988 presidential election, has been especially outspoken in criticizing privatization.

Buyers include multinational corporations--for example, Anglo-Dutch Unilever’s $74 million purchase of a cooking oil and pasta plant near Mexico City--and Mexican entrepreneurs. Consortiums of foreign and Mexican businesses have been assembled for large buyouts, such as that of Mexicana Airlines for $140 million.

Cardenas said he would have preferred to see companies simply given to their workers. The government has given 20 companies to worker groups and another 29 are scheduled for such transfers this year.

Most of the firms transferred have been agricultural distribution and marketing companies, which were given to farming cooperatives. Worker groups also get preference in sales of companies. However, such sales have not always been successful.

For example, the National Farmers’ Federation was the winning bidder in the January, 1988, sale of Algodonera Comercial Mexicana, a cotton marketing firm. But by August, 1988, the farmers were missing payments, and the government repossessed the company.

Early in the Salinas administration, the company was sold again, this time to a group headed by a Mexican businessman for $737,000 in cash and $2 million to be paid after the company is reorganized.

The Mexican government has been quick to turn down some multinationals. Chrysler’s offer for DINA, a consortium of auto parts and bus manufacturing companies, was rejected as inadequate in October, 1988. A year later, the company was sold to a group of Mexican entrepreneurs.

Such examples illustrate both the setbacks the Mexican government has encountered in its privatization efforts and the determination of the Salinas administration to overcome setbacks.