Calderón gets almost halfway
President Felipe Calderón issued a decree on 11 October to wind up the main state-owned electricity distributor, Luz y Fuerza del Centro (LyFC). Calderón announced his decision in a television broadcast to the nation. He went into considerable detail in two areas: the reasons why LyFC had to be dissolved and the government's powers to take such action.
President Calderón made it clear that he believed that LyFC had been allowed to decay for too long. The timing of his announcement was interesting. It came the day after Mexico secured its place in the World Cup Finals in South Africa in 2010.
The decision to wind up LyFC is a challenge to the Left and delighted Calderón's faltering supporters on the Right. Crucially, the main opposition Partido Revolucionario Institucional (PRI), the country's largest party and the dominant party in congress, is backing the move. The radical Left, led by Andrés Manuel López Obrador, is opposing it, though so far, is sticking to legal means. The Sindicato Mexicano de Electricistas (SME), which dominates LyFC, went to court on 3 November to seek an injunction to halt President Calderón's action.
The PRI's quiescence is the product of its expectation that it recover the presidency in 2012, and until then intends to act as a 'constructive' opposition, supporting policies in the national interest. In return, the government will run policies in its final three years that will allow the PRI to take up office with no immediate problems.
Indeed, if the LyFC decision is a foretaste of things to come, the PRI may be expecting the Calderón government to take the political heat for a string of unpopular, but overdue and necessary, policy changes. The key change will be tinkering further with the rules governing foreign involvement in the oil industry. As Mexican oil production is falling alarmingly, both the PRI and the ruling Partido Acción Nacional (PAN) want to take action to bring in foreign expertise and capital to remedy the situation. The political cost of such a move, however, is huge.
Arguably, no Mexican government has taken such a difficult decision since 1995, when the government of President Ernesto Zedillo Ponce de León (1994 to 2000) had to force tax increases through congress in the wake of the 1994 devaluation.
Since 1997 no government has had a majority in congress. The decision on LyFC may signal the start of a nine year period of renewed PRI hegemony in which its power brokers agree on a political direction with the current administration, which is dominated by the pro-business PAN, and this mix of moderate but pro-business policies will continue beyond the 2012 elections.
The danger of such an understanding is that the voters may object and overturn it. An opinion poll in El Universal, published on 14 October, found that while 48% of voters approved of the government's decision on LyFC, 43% opposed it.
What is clear is that both the Left and the Right believe that the liquidation of LyFC is the first step in a new government effort to overhaul and, if not to privatise, certainly to give the private sector a bigger role in key economic sectors. If Calderón's move on LyFC works, his government is likely to reform the Comisión Federal de Electricidad (CFE) which has taken operational control of LyFC. The CFE generates power and operates the national grid, as well as distributing electricity.
Francisco Labastida, the priísta chairman of the senate energy committee, welcomed the government's decision on LyFC. He said that people should recognise when decisions are taken for the good of the country and that LyFC needed to be liquidated. He supported the idea of keeping the LyFC, which provides electricity to Mexico City and its hinterland in the Estado de México, Morelos and Hidalgo, inside the CFE. This was what Calderón said would happen, in the decree, though there were some implications from Calderón's phrasing that this was only a temporary solution.
This suggests that the PRI may baulk at further privatisation, though the PRI does accept that the state sector needs a shake-up. Calderón stressed in his TV broadcast on 11 October that his government was not privatising the LyFC. This is true at the moment, but since 1997 successive governments have tried to find a way for the private sector to play a bigger role in the electricity industry. The supreme court has been the big block, ruling that any reduction in the state's role in the electricity industry has to be achieved by a law approved by congress. This closed a loophole which power companies had exploited. The current law allows industrial companies to have their own generating plants for their factories and to sell any excess electricity to the CFE. Under successive governments, power companies had been encouraged to build generating plants which sold a majority of their power to the CFE.
In the LyFC liquidation, the government has focused on the operational position, not what happens to the assets controlled by LyFC. All the decree authorises is that the assets are put in the hands of the Servicio de Administración y Enajenación de Bienes, effectively the official receiver.
The Left's counter-attack
Lawyers say that
constitutionally, it is not clear whether the president has the right to take
over and wind up a state-owned company, especially when there is no threat that
the company will not continue to provide services. Cleverly, the SME has not
threatened to strike.
Calderón argued that he had the powers to liquidate LyFC under Article 16 of the federal law governing state companies. These powers are exercisable when the state company is no longer providing the service it was set up to do. Calderón argues that the losses LyFC was racking up are unsustainable. He claimed that LyFC's annual losses were twice its revenues. He further claimed that the M$42bn (US$3.2bn) in tax revenues that went to LyFC each year were equivalent to what the government spent on its whole programme to combat extreme poverty which, Calderón claimed, benefited 25m Mexicans every year.
Lawyers question the government's position on two grounds. The first is whether it is legally correct to say LyFC was the product of a presidential decree or whether it was set up by congress. If the latter is true (and LyFC has been through several incarnations including one point when it was in a state of liquidation for 11 years) congress, not the president, alone has the power to liquidate the company. Almost certainly the supreme court will have to rule on this issue.
The second argument made by the SME is that the precedent of a presidential decree to liquidate Aeroméxico was triggered by a strike at the airline. There is no immediate threat to the service the LyFC provides. Some lawyers suggest that if the SME went to the Junta Federal de Conciliación y Arbitraje on the grounds that the government has overreacted in liquidating the LyFC, it would win.
The real issue in the government's dispute with the SME is the SME's dominance of the LyFC. Effectively, the union has for years run the firm in the interests of union members. As a result, the company provides a poor, expensive service and has racked up operating losses, met by taxpayers. Almost a third of the electricity the LyFC distributes is not paid for. Rightwingers suggest that the SME connives at this theft and indeed benefits from it. Some economists fear that the people with illegal hook-ups to LyFC power-lines will back the SME against the government.
Calderón said little about this, focusing his criticism in his TV broadcast
on the deal which the management at LyFC had signed with the SME. This deal
forces the LyFC to keep on hiring even though these new workers are not needed.
The clear implication of Calderón's statement is that LyFC was being run in
the interests only of its employees. Calderón added that the shortcomings of
LyFC were deterring companies from investing in areas where they would have to
rely on LyFC for electricity, so the problems at LyFC were affecting the whole
economy.
Calderón stopped well short of alleging that the SME is corrupt. He did not have to make that point. In the first week of October, the Mexican media was full of images of the lavish lifestyle of the SME leader Martín Esparza. Esparza's controversial re-election as president of the SME triggered the showdown. The media published pictures of Esparza's well-appointed horse farm in Hidalgo. Esparza argues that his life-style is the product of years of work. His critics doubt this.
Short-term, the cost of liquidating LyFC will be considerable. Calderón made it clear that all workers would get their statutory entitlements plus a bonus if they agree to accept the redundancy terms by 14 November. By the beginning of November 19,712 LyFC workers had accepted the redundancy terms. This is equivalent to about 44% of the payroll at the time of liquidation. Worryingly for the government, the number of people accepting the terms has slowed down, rather than accelerated, as the deadline has drawn closer.