Mexico’s Politicians Better See the Light

In the 1930s, when foreign companies monopolized the electric power generation industry in Mexico, it was not unusual for disgruntled Mexican consumers to refuse to pay their bills. These nonpayment protests were referred to as “strikes,” and they were effective, largely because there was no government authority to force consumers to pay for services rendered. In fact, it was routine for even government agencies to fall behind in their electric bills and then pay less than the full amount later on.

By 1952, the Mexican Light and Power Co. was so frustrated with this system that its chairman asked Mexico’s Federal Electricity Commission to simply take the system over by purchasing it. The federal government began to do so, on a piecemeal basis. By 1964, more than 90% of electric generation capacity in Mexico was owned by the state.

That arrangement persists until today but could change dramatically. Last month, President Ernesto Zedillo sent a proposal to the Mexican Congress that would set the grounds to make electric power the latest segment of Mexico’s state-run economy to be privatized. Like the privatization of the telephone company in 1990, it is sure to be controversial in both economic and political terms.

Before analyzing the political complexities facing Zedillo’s proposal, it must be acknowledged that the president’s plan is a rational attempt to deal with what looms as a very real problem for Mexico. The country’s electrical system is outdated and unprofitable, and, being short of the capacity needed for national growth, stands as a major roadblock to Mexico’s economic development.

The president argues that in the next six years the industry will require an investment on the order of $25 billion to satisfy demand. The government does not have that kind of money, a problem common to the world’s emerging markets. He believes that international investors will be motivated to invest in Mexican projects that seem to have a long-term future--like a new, privately run electric system.

But even if Zedillo’s proposal is reasonable, that does not mean it will have easy going in Mexico’s Congress. It is ironic, but Zedillo’s vision as a statesman doesn’t match his political abilities.

Zedillo’s proposal requires an amendment of two articles in the Constitution that legalized the state’s electric monopoly. It also calls for a new legal and regulatory framework. These legal changes will allow private power-producing companies to sell electricity to local distribution companies or to consumers through a yet-to-be-created agency managed by the government.

Because no one party controls a two-thirds majority in Mexico’s Congress, even modest reforms and noncontroversial measures require negotiation. And Zedillo’s plans for the electric industry are neither modest nor noncontroversial.

At the core of the political problems facing Zedillo’s plan is the issue of subsidies. Residential electric power in Mexico has a 40% subsidy. Without an increase in the rates charged to customers, the power industry will have no money to invest in modernization and expansion. Yet to raise electricity rates at a time when the standard of living of most Mexicans has been severely undermined by a series of financial setbacks--most of them linked to the free-market economic theories Zedllo so fervently believes in--could lead to social unrest.

Here, the 1990 privatization of the Mexican Telephone Company stands as a worrisome precedent. When Telmex went private, rates increased 40% to 50%. And even though the new owner of the company used much of its higher profits to expand and improve service, the lingering suspicion among Mexican consumers is that privatization means higher fees without improved service.

The timing of Zedillo’s proposal is also a problem. By making his plan public now, Zedillo has turned it into a campaign issue for the Mexican presidential race in 2000. And no matter how the initiative itself fares, the debate over it will hurt Zedillo’s ruling PRI party, which is why the PRI is split over the proposal.

For those PRI members with a nationalistic agenda, to denationalize the electric industry means giving up sovereignty. Another faction within the PRI supports privatization because it shares Zedillo’s concern about Mexico’s need for more efficient electricity.

For the center-left PRD, the concept of privatization is anathema. For them, the process of privatization undertaken by the present and two previous administrations has been a failure.

The center-right PAN is in an uncomfortable postion. If PAN members vote as a bloc, they could sway the decision. But to vote against privatization runs against their conservative, free-market principles; yet voting in support of Zedillo would reinforce the perception that PAN has sold out to the government.

The Mexican private sector supports privatization, but feels the president’s electricity proposals don’t go far enough. The government, argues the largest business association, must abandon its “statist” position and open the industry for a thorough privatization.

Foreign firms like U.S.-based Enron Corp. and Wartsila, a Finnish company that builds gas turbines, have already indicated an interest in investing in Mexico’s electric industry--but only after constitutional changes are made.

It is against this background that Zedillo must work to pass his initiative. If he fails, electrical inadequacy could hold back Mexico’s ability to compete in the world economy for years to come.