On July 25th, the Chamber of Deputies’ Budget, Public Account and Energy Commissions approved a draft bill that modifies parts of the Federal Law of Budget and Fiscal Responsibilities as well as the General Law of Public Debt and which attempts to implement a special budgetary and debt system for future production activities carried out by the State (namely PEMEX and CFE). One of the most controversial issues included in the draft are a couple of transitory articles that establish the possibility that the government might pay off both companies’ labor liabilities by turning a specific percentage of them into public debt. Therefore, the old argument that PEMEX needs to get rid of this burden emerges with new questions. Knowing that there is no possibility of escaping these obligations, what are the implications of this debt within public finances and, thus, taxpayers’ resources?
According to its balance sheet as of January 31st, 2014, PEMEX’s labor liabilities amounted to 1.15 trillion pesos or 7 percent of Mexico’s GDP. As if that wasn’t enough, it is estimated that 20 thousand unionized workers will retire and, thus, will receive generous benefits. PEMEX is not unfamiliar with the consequences of debt: in 2008, for instance, the state company failed on its quest for financial resources in other international markets, who conditioned their support to a deep debt restructuration as well as new collective labor contracts. Given the current liberalization of the oil sector, it is essential to readjust, especially after enabling new oil income to pay off costs in order to reinvest in more strategic plans. In order to achieve this, some of the proposed changes are determining what would be the optimal debt percentage that PEMEX should be accountable for considering its future cash flows as well as its investment plans. It would also be of great importance to review the legal considerations regarding the legality of this financial deal. According to the 73rd Constitutional article, public debt can only be authorized for the implementation of deeds that will directly produce an increase on public income (with the exception of loans used for monetary regulation, currency conversion or a national emergency). In spite of the legislative decision that may be taken, it is essential to review the contractual relation between PEMEX and its union in order to prevent such a massive debt as the one currently faced by the company.
In addition to short-term goals and financial transactions, it is imperative to take into account all the incentives that will be established after PEMEX’s finances are separated and a new way to register oil income takes place. In an extreme case, if the liabilities were to be fully absorbed and reserves were registered as assets for the company, PEMEX would become an undervalued company, something that would radically decrease the incentives to increase its productiveness or its implementation of future efficiency measures. It is no secret that the disproportionate growth of PEMEX liabilities is linked with collective contracts designed to manipulate specific groups within the oil workers’ union for corrupt and cronyism-related goals. The most logical solution of this massive problem is to conduct an investigation that will determine the administrative responsibilities of those that squandered the income of Mexico’s most important company. Nevertheless, and speaking in pragmatic terms, restructuring debt is an essential necessity. Decreasing the amount of liabilities in PEMEX would only be plausible in two scenarios: either the company is forbidden from registering reserves (assets) within their books in order to reflect a real status that will enhance and maintain a correct strategic planning or a reasonable debt percentage is assessed in order to enable the operation, reinvestment and complying of fiscal responsibilities acquired in the past. The main concern will be the opposite scenario: having PEMEX to register all of its reserves (thereby, showcasing itself as an immensely rich company) without any actual responsibilities: an open door for corrupt deeds. In other words, there is a lot that remains to be decided regarding PEMEX’s liabilities.