Privatization in Mexico: Telmex

The privatization process in Mexico has been dramatic on a number of fronts. In terms of its scope, nearly 1,000 state-owned enterprises have been sold since 1983. This divestiture, however, rather than leading to increased competition and economic efficiency, has led to a striking increase in the concentration of assets and income, as well as in the penetration of strategic sectors of the Mexican economy by foreign investors. These issues are particularly salient in the case of Teléfonos de Mexico, or Telmex, the national telephone company.

The Mexican privatization program began in the wake of the Mexican debt crisis in 1982. In November of that year, the government signed a Letter of Intent with the International Monetary Fund (IMF), which conditioned IMF lending on reductions in government expenditures (especially cuts in investment and real wages in the public sector), increases in taxes and public-sector prices, and privatization.¹ The implementation of that program was followed by a series of loans from both the IMF and World Bank geared both to promote production for export to earn foreign exchange and to create optimum conditions in Mexico for foreign investors.

The privatization program has been rife with controversy. In 1988, the government responded to a strike by Aéromexico workers by shutting down the airline, firing all 12,000 workers, and selling off the company. Similar actions were taken in the privatization of the copper company. These actions are partly responsible for there having been little subsequent opposition to the privatization process from organized labor. The fact that Telmex workers have remained relatively quiet on the issue can no doubt also be explained by the fact that they received a 4.4 percent share of the privatized company.² Also, since Telmex remained a monopoly until this year, there has been little pressure for job or wage cuts so far. On the other hand, a number of unions and civil-society groups joined together in 1996 to protest the sale of Petr—leos de MŽxico, the state-owned oil company, forcing the government to revise its privatization plans. Even the World Bank has admitted that the privatization of state companies has exacerbated the concentration of wealth and led to an increase in private monopolies. In a 1991 internal audit report, it acknowledged that "there has been a worsening of the already skewed and concentrated pattern of ownership distribution in the economy and an increase in vertical integration. Only a small group of local conglomerates have been involved in purchasing public enterprises." In fact, the assets of Carlos Slim, Mexico's richest man and a new owner of Telmex, total more than the annual income of the poorest 17 million Mexicans combined. During the Administration of President Carlos Salinas de Gortari, the number of billionaires in Mexico rose from 2 to 24.³

The Telmex Connection

Carlos Salinas announced his intention to privatize Telmex during his 1988 presidential campaign. It was in some ways a surprising decision, since the phone company was experiencing healthy profits and had embarked on a new investment program. A World Bank report on the Telmex sale speculated that "Telmex was chosen partly for its symbolic importance and partly as a potential source of a sizable amount of revenueThe privatization of Telmex would dramatically serve notice that Mexico was serious about privatization and the development of the private sector."⁴ The Bank was serious about privatization, too. It provided a US$500 million loan to Mexico in 1989 to reduce the "heavy burden PEs [public enterprises] impose on the economy" through their sale, liquidation, and merger, followed in 1990 by a US$22 million tehnical-assistance loan to accompany the Telmex sale.⁵ Prior to that sale, the government sweetened the deal by drastically raising telephone-service prices to consumers. In January 1990, it eliminated an indirect tax on telephone services and permitted Telmex to absorb the remaining taxes into its prices, which were allowed to rise substantially. The charges for measured local calls, for example, increased from 16 pesos per minute to 115 pesos per minute.⁶ At the time of the privatization the Mexican government owned 56 percent of Telmex's stock. The remaining 44 percent was publicly traded on the Mexican stock exchange. The government officially announced its intention to sell 51 percent of the voting stock (20.4 percent of total stock) in the company in September 1989 and received bids in November 1990. The winning bidder was a consortium led Carlos Slim's Grupo Corso, which, in December 1990, purchased 51 percent of the stock sold; Southwestern Bell and France Telecom each bought 24.5 percent of the voting shares sold. The total sale price was US$1.67 billion. The government sold additional shares in 1991 and 1992. Together with the 1990 sale, it received US$6.2 billion for the Telmex stock.⁷

Winners and Losers Telmex's stock prices increased considerably after the sale. While many financial analysts attribute the rise to improved efficiency at the company, the price hike clearly played a big role, as well. In its 1992 report on the Telmex sale, the World Bank estimated that the biggest losers from the privatization were consumers, who were worse off by 92 trillion pesos (US$33 billion). The government, domestic shareholders, and employees gained 16, 43 and 23.5 trillion pesos, respectively. The biggest winners by far were foreign investors, who gained 67 trillion pesos. In fact, foreign investors captured 90 percent of the net benefits from the sale. The report concludes that, "the privatization of Telmex, along with its attendant price-tax regulatory regime, has the result of `taxing' consumers -- a rather diffuse, unorganized group --and then distributing the gains among more well-defined groups, [foreign] shareholders, employees and the government."⁸ The authors projected, however, that in the long run consumers would benefit from reduced prices.

The "long run" appears still to be a ways down the road. According to Mexican economist Rocio Mejia, "consumers have found no improvements in the cost or quality of their telephone service." In fact, Mejia notes that, while international long-distance charges dropped 10-15 percent in 1996, Telmex increased the prices of national long-distance services by an equivalent amount.⁹ This trend is likely to continue into the future. Telmex's monopoly on both domestic and international long-distance services ended in January 1997. While Mexican investors must still maintain a controlling interest in the new long-distance companies, they have attracted a great deal of interest from U.S.-based companies. AT&T, MCI, GTE, Sprint, Motorola, Teleglobe and Bell Atlantic have all formed alliances with Mexican partners to enter the US$7 billion market. While Telmex's prices will continue to be regulated for the next six years, the new competitors are free to set their own prices. The government claims it will continue to subsidize rural telephone services,¹⁰ but in a time of continued pressure from the IFIs to hold down government expenditures, that may be a difficult promise to keep.

ENDNOTES

1. Pankaj Tandon, World Bank Conference on the Welfare Consequences of Selling Public Enterprises: Case Studies from Chile, Malaysia, Mexico and the U.K., Vol. 1: Mexico, Background, TELMEX, World Bank Country Economics Department, 7 June 1992, p. 6.

2. ibid., p. 12-13.

3. Carlos A. Heredia and Mary E. Purcell, The Polarization of Mexican Society: A Grassroots View of World Bank Economic Adjustment Policies, Equipo PUEBLO and The Development GAP, December 1994, p. 5, 10.

4. Tandon, Ch. 16, p. 3.

5. The World Bank Annual Report 1989, World Bank, p. 150; The World Bank Annual Report 1990, World Bank, p. 150.

6. Tandon, p. 23-24.

7. Tandon, p. 13-14.

8. Tandon, p. 39.

9. Steve Hellinger, "Public Pain, Private Gain: Mexico's Struggles with Privatization" (interview with Rocio Mejia), BankCheck, December 1996/January 1997, p. 9, and communication from Rocio Mejia on 1 April 1997.

10. Leslie Crawford, "Rivals eager to enter Mexico's telecoms," Financial Times, 5 May 1995.

Written April 1997, by Karen Hansen-Kuhn, The Development GAP.