Mexico: Modernizing without Privatizing?

By Arturo Damm Arnal *

Sunday the 17th of July, before a large group of followers, Andres Manuel Lopez Obrador, presidential candidate for the leftist PRD party, presented, with his typical lack of humility, “50 Commitments to Recover National Pride,” a goal that can only be achieved, in his vision of things, if he, and only he, is elected president.

Among the 50 commitments, they range from some correct ones, such as the one in favor of the operation of regional banks, to demagogic proposals suggesting cutting the president’s salary in half (If you pay peanuts, what do you get? Monkeys), and some contradictory proposals such as the one to modernize the energy sector, but without privatizing either the electric or petroleum industries.

To understand what it means to “modernize the energy sector,” as anyone who speaks of the issue knows, is to increase its competitiveness. And how is that achieved? By subjecting businesses to the discipline of competition, for which the first requirement is to privatize them. It is very clear that where no competition exists, by definition, there is incompetence. While it is possible for a monopoly to be efficient, it will never be as efficient as it would be if it faced competition. Competition among businesses produces efficiency, resulting in reduced costs and better service, all for the benefit of the consumer.

Those, like López Obrador, that are opposed to the privatization of the electric and petroleum industry, really oppose, more than anything, any benefits to those that consume electricity or petroleum, beginning with those businesses that use electricity and petroleum as production supplies.

The consequences of this are already evident, and are shown by the following two examples: One: Grupo Mexico, a large mining company, pays double for electricity, what it would pay in Arizona. Why? Because it has no choice in where to buy electricity other than from the government. And we say we want to be competitive?

Two: the petrochemical company Alpek decided to change its production line of polyester fibers from Mexico to the United States because it resulted in a savings of electricity costs of 50 percent! And we say we want to attract investment?

In open markets of competitors (Spain, France, Germany, Portugal, for example), it is typical of electricity suppliers to grant discounts and/or to offer, to their biggest clients, several contract options. This method of course respects freedom of choice as well as the value of competition, which those that defend Mexico’s government energy monopoly could care less about.

For his part, Alfredo Elías Ayub, general director of the Federal Commission of Electricity, CFE, indicated that they cannot be flexible at the moment with how they charge their clients (offering them discounts and/or offering them several contract options), because, apart from being a monopoly, their supply contract with Petróleos Mexicanos, PEMEX, is not flexible, because CFE does not have any other option for their own acquisition other than PEMEX. So we have a monopoly, PEMEX, impeding a more competitive operation of another monopoly, CFE.

Those, like López Obrador, that are opposed to the privatization of the energy industry, should understand that what is important is not privatization, but competition, and that privatization is the means and competition the ends.

Those, like López Obrador, that intend to modernize the energy sector, should understand that, at the margin of competition, and therefore of privatization, any modernization effort will produce poor results.

Those, like López Obrador, that are opposed to the participation of private capital in the petroleum and electricity industries, should be aware that what they are opposed to is freedom of choice for consumers, and to the competitiveness of businesses that operate in Mexico, and to the very investment that we Mexicans need.

López Obrador will one day understand that he is proposing something that has proved difficult when attempted elsewhere: modernizing without privatizing.

* Arturo Damm Arnal is a Mexican Economist and Philosopher devoted to journalism and college teaching.

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