Mexico’s 2013 energy reforms aim to jumpstart the country’s energy sector and state-owned oil company Petroleos Mexicanos (Pemex) by reversing the historical opposition to private sector participation in the exploration and exploitation of natural resources. By launching the first round of tenders under the new rules of the game this summer, Pemex seeks to attract private capital to resuscitate Mexico’s energy industry. The dramatic drop in petroleum prices had already changed the attractiveness of the initial concessions offered by Mexico. Worse yet, recent backsliding on reforms may stir doubts about the commitment of Mexican authorities to the new rules of the game.
A few days before the June 7th midterm elections, Mexico’s vaunted education reform, which is part of the modernization package touted by President Enrique Peña Nieto, suffered a severe blow. Under pressure from violent protests in the states of Michoacán, Oaxaca, Guerrero and Chiapas by the teachers’ union that opposes the reform, the government suspended the teachers’ evaluations. These performance evaluations are the cornerstone of the government’s efforts to measure the effectiveness of teachers and to provide a degree of accountability in a notoriously ineffective public school system. The suspension of the evaluations not only violates the Mexican constitution, it also suggests the government’s unwillingness to apply the law and to defend its reforms. Since the elections, the executive branch has sent mixed messages about teacher evaluations, first insisting that they would not be shelved and then backpedalling in the face of pressure.
If Peña Nieto’s administration is willing to yield to demands from violent protesters when it comes to education, how can it guarantee that investments by private companies in Pemex will be protected if similar challenges to the state’s authority arise? Moreover, how can the government guarantee that private capital will be used to improve the company’s infrastructure and not be siphoned off to fund other statist policies?
The energy reform, particularly the modernization of Pemex, was based on the perceived success of Brazil’s state-owned oil company Petrobras. Just a few years ago, Petrobras seemed to be the archetype of a successful state oil firm, because it welcomed private investment and even outside private competition. However, in recent years, the serious shortcomings in Brazil’s energy sector and Petrobras’ role in it have become apparent.
For Brazil, corruption within Petrobras has proven to be the Achilles heel of the administration of President Dilma Rousseff and her predecessor Luiz Inácio “Lula” da Silva. Since the Workers’ Party came to power 12 years ago, what many saw as the “Brazilian Take Off”— largely driven by income generated by Petrobras and a booming oil sector —has become a great disappointment.
So far, several Brazilian government officials and executives from Petrobras and other firms have been arrested for allegedly taking part in a billion-dollar political kickback scheme. The full extent of corruption within Petrobras and the government remains unknown, but the allegations against Rousseff and her party have jeopardized her ability to govern the country.
A lesson of the last century may be that governments in countries where corruption abounds are ill-suited to the management of oil companies and the stewardship of vast profits. Although multinational firms in this sector are accustomed to working under the worst conditions of corruption and instability, modern economies require new rules of the game that grow the industry and deliver lasting benefits to the people. So, in addition to protecting private investment, they should ensure that capital is used to improve the productivity of the sector and not diverted to serve the interests of politicians.
Unfortunately, Mexico and Brazil share similar problems with corruption and impunity that affect their growth. So, Mexico should learn from the Petrobas debacle, the collapse of Venezuela’ industry, as well as Pemex’s checkered past.
Passing the energy reform was only half the battle. Implementing it will be harder still. If Mexico’s leaders can muster the political will to hold the line against corruption and political pressure, they should be able to attract needed investments in exploration, exploitation, and infrastructure to benefit the company and country for decades to come. Peña Nieto and his team must demonstrate now whether his administration wants to build a new Pemex or another Petrobras.
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