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Mexican Privatization: Well, On Second Thought...

International -- Finance: PRIVATIZATION


Mexico's Zedillo slaps limits on foreign petrochemical ownership

Every year on Mar. 18, Mexico's President leads a grand celebration to mark the day the country nationalized its oil industry in 1938. This year, President Ernesto Zedillo Ponce de Leon went to the sweltering oil terminal of Ciudad del Carmen to solemnly vow never to part with the nation's sacred wells. What he didn't mention was the major controversy that has been brewing over the government's efforts to sell part of its energy sector--secondary petrochemicals.

In a move that surprised many observers, the government slapped a three-year moratorium on majority foreign ownership of many of the Petroleos Mexicanos plants it wants to sell. It was bowing to growing pressure from Mexico's top petrochemical producers as well as mounting public opposition to the sale. It now hopes that by guaranteeing Mexican companies majority ownership for three years, it can proceed with plans to sell 61 petrochemical plants and with other schemes to bring private investors into the energy sector. "This gets a lot of pressure out of the process," says new Energy Secretary Jesus Reyes Heroles. "No government can clash with public opinion, with business, with its constituencies."

Mexican officials had assumed that selling plants that make products such as ethylene and propylene would not stir up the sort of nationalist fervor that has long prevented Pemex from bringing foreign partners into the oil business. They were wrong. The planned auctions aroused opposition from leftist politicians, oil workers worried about their jobs, and much of the press. In the latest of many protests, demonstrators filled Mexico City's massive central plaza on Mar. 18 to rail against the auctions. Opponents all charge the government with selling the national patrimony to pay debts.

Business objections also played a role. Small chemical companies worried that foreign owners would cut off supply to the local market in favor of exports. Big business lobbied officials from the President on down to invoke a little-known NAFTA clause permitting a delay in foreign majority ownership. Local petrochemical heavyweights such as DESC, Alfa, Grupo Idesa, and Grupo Primex, are likely to go for controlling interests. Presumably, they could sell controlling stakes to foreign companies after the three year ban expires.

The political wrangle has delayed the start of the auction for the most attractive plants, the Cangrejera and Morelos complexes, which produce a variety of petrochemicals and were expected to generate the most interest. The government has decided not to apply the NAFTA clause to the giant Cosoleacaque ammonia complex because it is closest to sale. Final bids are due on Apr. 22.

WARY INVESTORS? While Reyes Heroles says the retreat was necessary for the sale to proceed at all, it could have negative consequences. First, limiting majority ownership to Mexican companies may reduce the sums the government receives for the plants. Moreover, foreign companies had already expressed concerns about potential environmental costs and labor problems. Not being able to buy controlling shares could further diminish their appetites. "Is this the last change or are there more to come?" asks Joaquin Moreno Uribe, president of Shell Mexico. While stressing Shell's long-term commitment to investing in Mexico, he noted "this reduces our level of interest" in petrochemicals.

In addition, the move is likely to revive suspicion about the cozy ties between the Mexican government and big business. Earlier privatizations of the banks and the phone system have been criticized as merely swapping state monopolies for private ones. Petrochemicals could be following the same pattern. Not so, says Reyes Heroles, who argues that unlike other sectors most petrochemicals face competition from imports or will be regulated by the federal antimonopoly commission.

Privately, officials say the petrochemical operations in question are not worth all the nationalist heat. Indeed, they only represent 8% of Pemex' assets and 1% of its profits. Reyes Heroles wants to move on and bring foreign investors into the electric-power and natural-gas industries, where opportunities could prove much richer. The government says its plans to open up natural-gas pipelines and distribution facilities could bring in $5 billion over the next five years. But these schemes could hit snags of their own.By Elisabeth Malkin in Mexico City

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