Canceled Oil Sale May Deter Investors

U.S. companies and others expressed surprise and disappointment Monday after the government announced it would sharply scale back the privatization of Mexico’s petrochemical industry, a move that had been a pillar of President Ernesto Zedillo’s economic reform policy.

The decision could chill foreign investment in other sectors, some analysts said, money the government is counting on to bring its infrastructure up to first-world standards.

“I think the industrial community, above all the multinational companies, are a bit shocked by the decision,” said Victor Bermudez, an attorney for Dow Chemical in Mexico. “I would say this reduces our interest” in investing in Mexico’s oil industry.

Energy Minister Jesus Reyes Heroles announced Sunday that, in the face of mounting popular opposition, the planned sell-off of Mexico’s petrochemical plants, which was expected to raise as much as $1.5 billion, would be canceled.

Instead, he said, the government would group its 61 petrochemical plants into 10 to 15 consortiums, and allow private companies to purchase up to a 49% stake in each.

The petrochemical sale had been the centerpiece of the Zedillo administration’s ambitious privatization program, which also aims to sell railroads, ports and airports. The government had hoped raise several billion dollars and free up the national oil company, Pemex, to focus on more profitable activities such as drilling and exploration.

But authorities underestimated the uproar that would result from auctioning off part of the oil industry, which was seized from foreign companies in 1938 and is seen as a symbol of Mexican independence.

Reyes Heroles acknowledged in an interview with The Times on Monday that “the mood [over the privatization] was getting sourer and sourer.” But he insisted the change in policy wasn’t a step backward, and said it wouldn’t cause a loss of investor confidence in other privatization efforts.

“I would argue exactly the contrary,” he said. “The risk . . . is that the petrochemicals [protests] could have contaminated other [privatization] processes. With this, you eliminate that risk, you can move ahead very smoothly.”

The minister said the government planned to form the new consortiums by January. About six months later, authorities will begin to sell the partial stakes in those companies.

Whether national and international companies will still be lined up to bid for the stakes is unclear. The government hasn’t run the petrochemical plants efficiently, analysts said.

“With investments limited to 49%, we will have to think twice,” said Roberto Rodriguez Puente, operations director of the Mexican chemical firm Grupo Cydsa, in an interview with the Mexico City daily Reforma, published on Monday.

Said Rafael Quijano, a director at the Washington-based Petroleum Finance Corp., an industry advisory firm: “Are you going to buy 49% of a company you’re not going to have control of?”

The new policy appeared to be on solid ground legally, according to some analysts. The previous privatization process had been questioned by the Mexican comptroller and some congressmen who interpreted it as a violation of the constitutional provision that the government control oil and its byproducts.

The turnaround on privatization contributed to a 1.43% drop in the Mexican stock market’s main index on Monday. Analysts said market players were disappointed that the government wouldn’t receive the income from the sale of the petrochemical plants this year, as had been expected.

The market also was hurt by a correction in the peso, which slid to 7.73 from a close of 7.6750 on Friday.

Roberto Salinas, an analyst at the Center for Free Enterprise, a Mexico City think tank, said the change in the petrochemical policy could hurt other privatization efforts.

“Political interests won out over reformist tendencies,” he said. “What certainty will investors have in [the privatization of] natural gas or railroads or highways or other infrastructure, where the same can happen?”

No other privatization, though, has been bedeviled by the kind of controversy surrounding the petrochemicals industry. Some analysts said the government had salvaged what it could from the petrochemical sale, especially after the ruling Institutional Revolutionary Party denounced the privatization at its congress last month.

“You could say the glass is half full,” said Quijano, noting that many people feared the petrochemical sale might be called off entirely. Nonetheless, he said, the privatization was far less attractive now.

“A lot of companies wanted to drink the whole glass,” he said.

* PESO FALLS

Mexican currency is at its lowest point this year. D3