Profile : On the Ground Floor of Mexico’s Privatization : * Alfredo Lelo de Larrea is the government’s turnaround expert. And he’s doing just that, turning troubled firms into companies that will sell quickly in the private sector.

Mexican entrepreneurs have long been suspicious about how government-owned companies were run. And over the past three years, Alfredo Lelo de Larrea has personally confirmed the worst of those suspicions.

He has, for example, discovered plants filled with imported industrial freezers, refrigerators and smoking chambers--the industrial version of a smokehouse--not just underused but still in their original packing crates, covered with dust. He has seen high-technology, capital-goods factories built in remote fishing villages where no one could be trained to run them. He has audited a leading Mexican mine with payments due on its debt that exceeded its total revenues by a third.

Lelo de Larrea’s task has been to convert those troubled enterprises into companies that would fetch top dollar when the government put them on the auction block.

He is a Mexican-style turnaround expert, part of a team of seasoned business people and recent graduates of prestigious foreign universities responsible for divesting the Mexican government of its vast commercial and industrial empire.

Since 1982, nearly 900 of the federal government’s 1,155 companies have been sold, liquidated or given away to states and cooperatives. By the time President Carlos Salinas de Gortari leaves office in 1994, he expects to have taken the state out of everything except the oil monopoly, the electric power company, the Mexico City subway, the corn and beans distribution networks and the development banks.

“This is a historic moment,” said Lelo de Larrea, a wiry 50-year-old with wavy hair, graying at the temples. “There will never again be such a massive privatization. I am proud to be part of it.”

The companies being sold represent 40 years of investment, subsidies and nurturing at the expense of Mexican taxpayers. Now that they are being sold off, officials want to get the highest price possible for them, to generate the maximum revenues for the government’s new spending priorities--mostly social services.

That’s where Lelo de Larrea comes in.

“If we just sold the companies as they were, we would have received very little for them,” said Treasury Secretary Pedro Aspe, the Cabinet officer in charge of privatization. “People like Alfredo Lelo de Larrea are the key to making these companies marketable.”

Until the 1980s, Lelo de Larrea was exactly the kind of person who would never have been considered for a government position. Educationally, he is the product of Iberoamerican University, a Mexican Ivy League school, and Panamerican Business Administration Institute, a bastion of private enterprise. Professionally, he has held administrative and operating positions in companies ranging from a restaurant chain to the Monterrey-based industrial giant Alfa. He also has worked as a labor relations consultant.

Under President Miguel de la Madrid’s administration, which took office in late 1982, criteria for hiring government employees broadened to include people from the private sector. Lelo de Larrea was hired as personnel director at the Tourism Ministry, then was reassigned to the new divestiture unit when the Salinas administration took office in late 1988.

His first assignment, in February, 1989, was a machinery-making company called NKS, a joint venture of the Mexican development bank Nacional Financiera, the Japanese steel conglomerate Kobe and Sidermex, a government-owned steel company. It is part of the huge, oceanfront steel complex in the south of the country named, ironically, for Lazaro Cardenas, Mexico’s most popular president, known for nationalizing the oil industry.

“This was an ambitious project, using the world’s most advanced technology in one of the world’s biggest capital goods factories,” recalled Lelo de Larrea, in his rapid-fire speaking style. “And it was located in Melchor Ocampo, a fishing village of about 8,000 people.”

He was told to figure out whether the factory was even feasible and--if it were--to get it up and running in a depressed international capital goods market.

He persuaded some of the fishermen to try factory jobs and brought workers from the rest of the country to fill the remaining positions. He sent key people to training courses in Japan, Germany and the United States. Now, NKS is to be among the assets sold when Mexico starts privatizing government steel plants this fall.

Lelo de Larrea, meanwhile, turned his attention to the government’s 17 regional fish-processing companies.

“In Topolobampo and Yucalpeten there was machinery still in packing crates, everything needed for processing fish, from freezers to refrigerators to smoking chambers,” he said. “Then, in Guaymas, there were two plants. One was operating. The other was completely new--had never been operated. A whole plant of equipment in packing crates.”

He started taking inventory and looking for buyers at the same time. Now, all 17 companies have been sold, and Lelo de Larrea is finishing his biggest challenge--a manganese mine that is a classic example of how the government came to own 1,155 companies from soccer teams to auto makers--and why it is selling them.

Minera Autlan was founded in 1953 as a joint venture of Bethlehem Steel Corp. and Mexican investors led by the Madero family. In the next 20 years, the company found a major deposit of manganese--a metal used in steelmaking--in the central Mexico state of Hidalgo, then built the roads, pipelines, foundries and port needed to develop and market its discovery.

When the 1973 foreign investment law of populist President Luis Echeverria forced Bethlehem to sell its stake in the company, the Maderos increased their interest and the rest of the stock was sold to the Mexican government. The development bank Nacional Financiera took a major position and provided a guarantee for the company’s loans from Morgan Guaranty Trust.

The new owners launched an aggressive expansion program, financing it with debt, mainly in dollars. Over the 10 years, the company took on $110 million in debt to U.S. banks, with government guarantees, in addition to the financing that shareholder Nacional Financiera supplied.

Double-digit inflation, two major peso devaluations, rising interest rates and lower commodity prices left the company with debt payments 33% higher than its revenues.

Despite a 1986 debt restructuring, the company was still in serious trouble at the end of 1988, unable to meet payments on the money it owed. The government gave the Madero family six months to straighten out the problems or face a state takeover.

In May, 1989, Nacional Financiera took control of the mining company, and Lelo de Larrea was brought in last year to get it ready for sale.

“The company was in completely deplorable condition,” he said. “Losses were high. They were missing debt payments, not even keeping up with the interest.” As a result, Autlan had not invested in the work necessary to prepare new veins for mining as old veins played out.

First, Lelo de Larrea restructured the debt--Nacional Financiera wrote off nearly 80% of the $253 million owed--so that interest payments fell from $18 million every three months to $400,000. He also cut the work force by nearly one-quarter, to 2,400 employees.

“Both those measures were vital in order to sell the company,” said mining expert Pedro Sanchez Mejorada.

Once he pared the costs that he could, Lelo de Larrea went a step further, renegotiating contracts with Autlan’s distributor, Mexalloy International, based in Mobile, Ala. Mexalloy had been a partially owned subsidiary of Autlan, so Autlan had been tied to long-term contracts at unfavorable terms that would also have made the mining company unattractive to prospective buyers.

The government put $7 million into new mining equipment and another $5 million into a pollution-control system for the smelter. Lelo de Larrea and his team also commenced exploration and mine preparation, developing a five-year, $50-million investment plan that will be turned over to the new owners when the company is sold.

Lelo de Larrea measures his success at turning around Autlan by the impressive list of potential bidders: five consortiums, each with an important U.S., European or Japanese mining company among the investors.

What’s next?

“I have not been told,” said Lelo de Larrea. “One always hears rumors and has aspirations, but in the end, you go where you are sent.”

Biography Name: Alfredo Lelo de Larrea Title: General manager, Minera Autlan Age: 50 Personal: Born in Mexico City. Graduate of prestigious Iberoamerican University and Panamerican Business Administration Institute. Worked in private industry for 18 years before joining government divestiture team when privatization began in 1982. Married to Eloina de Haro. Three sons, ages 10, 14 and 16.

Quote: “A chief operating officer is nothing more than an orchestra conductor. He does not have to know how to play all the instruments or be a soloist. He just has to know how to read music and to coordinate efforts.”