PEMEX’s unfinished reform.

share on:

Regardless of the controversy surrounding it, the energy reform represents a landmark for Mexico’s economic development. Nevertheless, the real question is if this institutional change has affected the organizational, operational and budgetary structure of PEMEX and whether it will impact the efficiency of the company’s exploitation of hydrocarbons throughout the country. The answer, considering the discussed laws, is no: at least not in the way it was expected. While the energy sector would open itself to a competitive scheme, PEMEX’s structure did not and kept a system that could be incompatible with a model of competition within the sector. As a matter of fact, an unsustainable hybrid came to life: a company with corporate-like features but within a regime of federal budgetary control and under non-competitive labor rules. By remaining under an absolute control of the federal government, PEMEX is facing four key issues: one, an impact on the corporate governance’s structure; two, a potential damage in the efficient use of production factors, particularly in labor resources; three, a strong uncertainty regarding the company’s liabilities (which, according to the amount of reserves that PEMEX may have could lead to the creation of extremely corrupt incentives); and four, the fiscal disadvantage against other competitors.

Firstly, PEMEX’s Board of Directors will be led by public officers: this specifically refers to the cases of the Secretariat of Energy as well as the participation of the Secretariat of Public Finance, something that will only continue to politicize the company. The role of independent advisors is yet to be defined, confirming the aforementioned risk. Likewise, the second article of the Mexican Oil Law – which has been modified – established that the ownership of the company will remain within the federal government rather than the State. The latter is something beyond a semantic discussion: it is important to highlight that the public good that is sought by the State may not be the same as years pass and governments change. In addition, and without entering in the discussion of a potential conflict of interests in the aforementioned case, the truth is that the company’s main economic objective will be subject to collection interests rather than of a productive efficiency. In other words, the organization’s corporate governance will not only be dependent of political shifts but it will also be subject that the government is not able – and, as of now, does not need – to guarantee an increase of taxpayer as well as a rise of tax allocations throughout other economic sectors.

The aforementioned matter leads to the second and third issues. Despite the liberalization of the sector, the productive public company’s authority is subject to crippling labor agreements established in the oil union’s laws and their current collective labor contracts. Nothing has been said on how PEMEX will deal with its massive labor liabilities – whether these will become State debt and the government will be responsible for them, as was previously stated by a PRI deputy in Congress – or the flexibility with which the company will have to hire and dismiss employees – something that seems to have not been reviewed at all. The 43rd article of the Mexican Oil Law established that the Committee of Human Resources and Wages will be formed by the Secretary of Public Finance and that the Administrative Council will have to “comply with what has been established within the current applicable legislation and collective labor contracts”. This means that PEMEX will not be able to quickly adjust its workforce whilst other companies in the sector will be able to do it, something that puts a great amount of pressure on the company. Between 2004 and 2013, PEMEX’s corporate governance increased its number of employees by 47% while its production decreased by a million barrels per day. If the company is not able to manage their workforce in an optimal way, it will certainly not be able to improve its manner of exploiting resources while decreasing costs. In fact, they won’t have any incentives to “clean it up”, turning it into a competitive business and increasing its productiveness.

Finally, the fiscal scheme that was established in the Law of Hydrocarbon Income does not guarantee an adequate fiscal balance amongst PEMEX and other energy companies. While for the former there is a complex and rigid system with a harsh taxation for profits – also known as assets – for the latter there is a simple and direct payment. In comparison, PEMEX’s payment of operating dues is higher than loans made by private stakeholders, thereby creating a different competition scheme. Likewise, aspects such as the percentages of deduction tend to differ. The aforementioned should not lead us to believe that PEMEX “should have never been liberalized”, but to highlight that a partial independence might turn out to be a counterproductive issue for the company taking into account an environment of increased competition. It is not an impossible scenario, due to the contradictions existing within the scheme designed for PEMEX, that both the competitive and non-competitive systems will collide with each other and, thus, the company might have to readjust and implement a thorough liberalization.

The fundamental question is, why, despite the low oil production, isn’t PEMEX more independent from political shifts? It is important to observe there are not currently any pressure from the market that is pushing this institutional modification. Particularly, the high prices of oil barrels forecast a scenario where public finances might increase but, as history has shown, these same figures might change overnight. In addition, it seems that in Mexico it is easy to modify the fiscal scheme of other sectors – such as tax increases for the manufacturing or exporting industries that were included in the previous tax packages – rather than implementing a fiscal makeover for the “goose that lays the golden eggs”, also known as oil revenues.


share on: