The Cost of Sacred Cows

Luis Rubio

How many jobs, and growth points, are the Mexican society –and its government- willing to lose because of the itch to preserve entelechies like Pemex and the CFE? The government has announced that it will guide itself by productivity criteria and that it will devote itself to creating conditions for accelerating its growth. The concept is correct: there is an absolute correlation between the growth of productivity and that of the economy. However, beyond other factors (some not so minor) the two monsters that subtract the most productivity from the Mexican economy are the government-owned energy companies. If these enterprises are not transformed, the argument for productivity ends up being, in the youthful vernacular, unadulterated spin.

At the heart of the Mexican economy lies an enormous contradiction: one part is extremely competitive and productive, while the other lives by a miracle, the miracle of governmental protection. The latter is true for the manufacturing sector that survives thanks to subsidies and import tariffs as well as for the government-owned enterprises that subsist thanks to their not encountering any competition whatsoever. The enormous productivity that the first group generates is in the last analysis eliminated–wiped out- by the negative productivity yielded by the rest of these. The result is many fewer jobs and less growth than could be possible. That is, on perpetuating these corrupt and bureaucratic monsters, the country is sacrificing its future and its prosperity. There’s no other reading possible.

There are two ways to analyze the governmental and political obduracy. One is referring back to history, to the interests that prey on and off these companies and the narrative that the revolutionary regime constructed throughout the years in order to preserve (and milk) these niches of power, corruption and seemingly interminable wealth. There are certainly historical precedents that explain the petroleum regime, but they are also cause of its poor performance and lack of productivity, for those are the incentives that a monopoly creates. History has been exploited –and abused- for all its worth. On the other hand, it is evident that, in the absence of effective checks and balances, privatizing the resource would be unimaginable. Plain and simple, if other economic and political actors, all much smaller, bypass all the regulatory roadblocks and poke fun at the authorities without nary a blush, what would be necessary in institutional terms to ensure that this would not take place in electric and oil matters under a new regimen?

The other way of understanding the perseverance of the State monopolistic regime in this matter would consist of assessing the cost that the existence of these monopolies entertains for the domestic economy. Different from the first perspective, this one allows determining the price that the Mexican society has paid for the urge to make the union and its bureaucracy rich, in addition to the public servants who, inside and out, prey upon the monopolies. Pemex has 6.6 times more employees than Statoil, the Norwegian State enterprise and 1.8 times more than Petrobras, the Brazilian one; thus, its sales per worker amount to a fraction of those enterprises. While Statoil produces 78 barrels per worker, Pemex hardly reaches 25. In some cases the untold squandering of resources is unutterable (e.g., Chicontepec), where perhaps the problem was technological, but in others, such as in refining, a business of margin, endemic inefficiency explains 100% of the problem. Something similar occurs in the case of the CFE: the rates it charges were 41% more than those of the OECD in 2011 and that’s not counting the power outages, the brownouts, etc. The cost of the monopolies is monumental*.  And that does not include what economists call “opportunity cost”: what could be done with those resources in other areas.

The numbers suggest the obvious, what we all know: far from contributing to development, the government-owned monsters subtract productivity from the country’s economy. From this perspective, it would be reasonable to analyze what would happen if the monopolies were dismantled and if investment in energy as well as in other sectors were freed up to create a real energy market in the Mexican economy.

Though from a merely speculative level, it would appear evident that the results of action in this direction would allow catching a glimpse of waves of investment in energy and infrastructure. What are today old behemoths plying obsolete technologies, little investment in resource development, deplorable distribution infrastructure (the urban hardwiring network guaranteeing poor electrical service comes to mind) and insufficient and poorly maintained gas ducts and oil ducts (ergo, dangerous) would lead to an explosion of new investments in networks, ports, gas ducts and distribution.  There is also the issue of the opportunity cost of what Pemex does not do, for example tending to the old oil wells (mostly small) that require capital investment and management that the entity cannot provide. More to the point, these investments would drive the growth of productivity in key sectors of the domestic economy, thus the modernization of the country. The jobs lost in the present monopolies would be compensated for by new jobs created by new businesses and investments that are at present inconceivable because its current structure makes the development and capitalization of the industry, as well as access to the most modern the industry impossible.

A former director of Pemex once argued that the entity’s problem does not reside in the corruption or the number of employees but in the permanent dismemberment that its structure of governance entails because everything is organized to extract resources from the enterprise instead of permitting its development. He illustrated his comment with the Ministry of Finance’s interest in skimming off resources, the Energy Ministry’s interest in undermining the director of the enterprise and that of the President to reward his cronies with posts and “opportunities” in the entity. His comments concluded with the following: when the barrel of oil costs 18 dollars and sells for 100, it really doesn’t matter whether the net cost is 22 or 23 in view of the fact of inefficiencies as well as all those taking their cut along the way. This is not a foolish argument, but a profoundly realistic one in the political context in which Mexico operates. However, the real implication of leaving the monster untouched or, as the comment of this ex-director suggested, to create a better structure of internal governance but without changing its essence, would be to produce more oil for the satisfaction of the insatiable Finance Ministry without failing to subtract productivity from the economy in its entirety.

The energy monopolies are not as benign as many believe: in addition to pillaging, their functionaries busy themselves with thwarting other initiatives from prospering, such as Oaxaca’s wind farm, at a standstill these two years. For Mexico to prosper, it needs to develop its energy resources, to create a true revolution of energy, not a mere and irrelevant change of façade. Of those we’ve had plenty.

*based on figures submitted by CFE and Pemex to the SEC.