As part of its new economic program to promote investment and raise capital, the Mexican Government is undertaking its third major round of privatization since the 1980s. And in a clear demonstration to the world that Mexico is not wavering from the path of economic liberalization, President Ernesto Zedillo is also further opening up sectors to foreign investment that have already been privatized over the last few years. This is presenting a number of significant opportunities to U.S. investors.

Two sectors, petroleum and radioactive materials, will remain under the exclusive control of the government. Ownership of broadcast television, radio and credit unions will continue to be reserved for Mexican private investment. However, Mexican law has recently been changed to make it possible to sell strategic resources that had previously been considered off limits.

The railroads can now be sold to domestic and foreign investors. Natural gas is still considered a strategic resource, but its transmission, distribution and storage is not -- and may now also be sold to the highest bidder. Other businesses open to new foreign investment include satellite operations, telecommunications, secondary petrochemicals, power generation, financial services, ports and airports.

Since the 1980s, nearly 1,000 of the 1,155 state-owned businesses have already been sold to private entrepreneurs, merged or closed. This generated $14 billion in revenue and savings. These businesses included hotel chains, steel producers, mining companies, insurance providers, airlines, banks and telecommunications companies. With an additional $14 billion expected to be generated from the new round of openings, Mexico's ability to raise capital appears undaunted by the recent financial crisis.

Under current foreign investment laws, two-thirds of the Mexican private sector is open to foreign ownership. Cumulative foreign direct investment totaled $50 billion by the end of 1994. The United States and Canada have invested 62% of this; the European Economic Community, 25%; Latin America, 7%; and Asia, 5%. The manufacturing sector has continually attracted the most foreign direct investment, 40.5%; followed by the service sector, 31%; transportation and telecommunications, 8.5%; and financial services, 8.5%.

The new round of privatization and further investment openings will not only raise much needed capital, but will also help Mexico, to a greater extent than in the past, modernize its infrastructure and economy.

Over the years, privatization of companies has not always benefited Mexico to the degree anticipated. For example, in the past many state-owned enterprises were sold to domestic investors only, not allowing sometimes more qualified and cash-strong foreign investors to bid. Many analysts believe that this policy restricted competition, and did not always push new owners to become as efficient as they may have under more competitive, open market conditions.

For example, in 1991 the Mexican Government began selling the 18 largest banks it had seized back in 1982 -- but restricted experienced foreign banks from bidding. The sale of the telephone company and two airlines, Mexicana and Aeromexico, was no exception. As time progressed, some of the newly owned and managed companies seemed to be in little better position than when controlled by the government. Under the new round, open bidding to both domestic and foreign investors and greater scrutiny to ensure an ability to meet financial requirements is likely to minimize, if not eliminate, the problems caused by past practices.

Instead of simply selling the railroads to the highest Mexican bidder, the Mexican Government studied various options for their sale. The first option considered a 50 year concession for the entire railroad system to one qualified owner. Other options split the system into competing private railroads.

Reportedly, in June more than 500 potential domestic and foreign investors attended a meeting in which Mexican transportation officials explained their privatization plans. With the publishing of bidding rules and actual bidding to commence as early as this fall, final plans call for the division of the railroads into three concessions.

Several large U.S. and European lines are considering making offers for the Mexican railroads. Union Pacific and others appear interested in the routes running north to the border and serving automobile plants. Before some companies bid, however, they are requesting answers from the Mexican Government as to the new owners' degree of flexibility on work force and passenger services issues.

Under the North American Free Trade Agreement, Pemex, the Mexican state-owned oil company, was not opened to investment as many U.S. companies had hoped. However, while the production of natural gas remains the domain of Pemex, several activities related to getting the product to market are for the first time open to foreign investment. These new opportunities reportedly attracted about 120 U.S. companies to a series of three day meetings recently held in Mexico City sponsored by the U.S. Department of Energy and Mexico's Secretaria de Energia.

Continued privatization and further opening of Mexican sectors to foreign investment will continue to substantially enhance economic progress and speed recovery in Mexico. Just as important, as the short-term economic crisis abates, U.S. investors in Mexico will have the chance to establish a strong new foothold in Mexico that benefit them well into the future.

This article appeared in The Exporter, September 1995.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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