Amiguismo

It is December 2007 and I am in a coffee shop in a resort town in Mexico. I pick up a copy of the local newspaper, and start browsing past the front page. On the front page of the business section (Negocios) is a headline that reads, “Hallan daño patrimonial en Pemex por 5 mdd.” I always look at news regarding the parastatal industries, as I am a skeptic regarding state ownership and operation of industry. State run industries tend to be riddled with political obstacles to efficient performance; slush funds for labor leaders; diversion of funds from investment in infrastructure; and corruption.

 Pemex (Petroleos Mexicanos) is a good example. Although Mexico is the sixth largest producer of petroleum in the world – much of it destined for the United States – it is an importer of refined petroleum products, such as gasoline and jet fuel, as well as natural gas.

Why? Pemex is a parastatal industry. Officially independent of the government, Pemex keeps only enough of its profits to cover its operating costs. The rest is confiscated by the Mexican government to fund its programs. In return, Pemex is granted a monopoly on oil extraction within the country. It doesn’t work very well. Mexico would be better off to allow competition in the oil production sector, and simply levy a fat tax on the oil companies (domestic or foreign). They would get a more efficient oil industry, and some private company would realize the potential in the value-added industry of refining raw petroleum products. As it is, Mexico is basically just an exporter of a raw commodity.

So it was with some interest that I read that the Auditoría Superior de la Federacion found that Pemex executives had overcharged the Company by more than $5 million dollars (that is U.S. dollars; not pesos) by contracting shipments from a company called Arrendadora Oceana Mexicana, while a company called PMI Trading was offering the same service at a better price. Allegedly, seven managers of Pemex colluded in the scheme to accept the more expensive contract, presumably in exchange for some kickbacks. The result was that Pemex (and therefore the Mexican government) lost over $5 million (USD) that ended up in the hands of the shipping company and the Pemex officials who arranged the deal.

The newspaper account identified seven directors of Pemex by name and position. A member of the Mexican Congress (Cámara de Diputados) denounced the behavior of the parastatal enterprise, saying that this type of thing is recurring, and that Pemex officials are not only permitting it to occur, but by not taking action are actually encouraging corruption!

Here is the quote in Spanish:

(Jose Manuel del Rio Virgin)… denunció que ese tipo de situaciones “se ha vuelto cada vez más recurrente y las autoridades de la paraestatal lo permiten y hasta lo fomentan.” (Mauricio Juárez y Fernando Damián, Opina Vallarta, 22 Diciembre de 2007, 6b)

There are two interesting side stories here: one is that this is not an isolated incident, but rather a systemic problem in the Mexican government. The other is that, despite the fact that the press exposed a kickback scheme between officials in a government-owned enterprise and a private shipping company, there is no sense of outrage – no follow-up or pressing demands that these individuals be charged with crimes and tried in court.

One friend of mine who has lived in Mexico for some 50 years told me that it was offensive and alarming to read, but what was even more offensive was that the people seemed impotent to effect any remedy for it. The news appears. A member of the Chamber of Deputies makes a strong statement. The public is treated to another example of inept management of the country’s resources; and then the story disappears.

I asked, “Well, why don’t congressional committees follow up on these types of things and demand prosecution? They already know the names of the people involved.”

“It wouldn’t do any good,” said my friend. “These people can lose their jobs. The members of the Congress who don’t persecute them may get voted out of office. It doesn’t matter to them. Once you are in the party (in this case, I suppose the PAN), you might lose your position, but the patronage system will always work for you. A friend will find you another position in the government. You just move laterally to a new public office.”

It’s called amiguismo. It is the power of individuals over the power of their offices. They rule fiefdoms within the bureaucracy, and count on personal relationships to protect them when they get caught doing what everyone wants the chance to do: steal a great deal of money from the government.

Cultivating personal relationships in the bureaucracy is the primary source of job security in a system where bureaucrats have wide discretion to award licenses, contracts, or money. In such a system, when the jefe moves to a new position, he makes room for his followers. Loyalty flows both ways, and infractions are overlooked, so long as they are not so flagrant as to embarrass some higher official, and thereby threaten the job security of the functionaries below him (or her).

Sure enough, the following day the story about the seven Pemex officials had disappeared. I suppose it will air on Mexican television for a while, but you won’t see the kind of dogged persistence to get a resolution that you saw in the United States after the Iran-Contra scandal (Reagan administration), or the questions regarding Hillary Clinton’s campaign contributions during her husband’s presidency, or the dogged persistence of a special prosecutor intent on impeaching Bill Clinton for having a sexual relationship with an intern. (Rumor has it that the reaction in Mexico was disbelief: how could the most powerful man in the U.S. have come within inches of impeachment for taking a mistress – and not chosen one more attractive?) Just recall the multitude of questions directed at the Bush administration regarding the Halliburton contract for the oil fields in Iraq.

Just imagine the howls of protest from Congress and the press if it were discovered that officials at the Pentagon had awarded Halliburton contracts at inflated prices and taken a share of the money under the table! It would be front-page news for weeks, and would be on all the news networks until criminal charges were brought by the U.S. Attorney General. Army officers would receive court martials. Halliburton executives would be indicted by the Department of Justice. The Democrats would bludgeon the Bush administration with this as evidence of corruption and incompetence, and the story could affect the outcome of the 2008 election. In short, it would be a big deal with real-life consequences.

In Mexico it isn’t. Stories of corruption are commonplace, and the guilty parties are seldom incarcerated. Well, actually I don’t know that. What I know is that the stories disappear from the news (along with the guilty parties), and journalists are left to lament the state of affairs that allows and even encourages public officials to use their offices to either rob the public treasury or extort money from private corporations.

To make my point more forcefully, let’s examine some recent examples of corporate malfeasance in the United States, and let me offer a contrast. Let’s use some big-time scandals that made WorldCom, Tyco, Adelphia Communications, and Enron all household names. Remember, these were just private sector companies defrauding their shareholders; not government personnel using their positions to enrich themselves at taxpayers’ expense. In each of the above cases, the press, the SEC and Department of Justice followed the charges, and the individuals involved ended up paying fines or going to prison.

Adelphia, the sixth largest cable operator in the U.S. in 2002, filed for bankruptcy that year after it became known that the family who controlled the company, together with senior management, systematically looted the corporation over a period of about four years. They stole about a hundred million dollars, according to prosecutors. They hid loans of over $2.3 billion from their investors and inflated their operating results by booking phantom management fees. In January 2005 the company put forward a $300 million settlement offer to satisfy disputes with the SEC and Department of Justice.

The Regis family members - a father and two sons - were convicted of securities and bank fraud and sentenced to between 15 and 20 years in prison. Currently, they are free, pending appeal.

Enron executives inflated the value of future contracts at a time when the Company was concealing growing debt. They did so by burying the liabilities in “special financing vehicles,” such as partnerships, so that the liabilities would not impede their access to new loans. Enron was then using these loans to support the price of its stock! They were borrowing to inflate the stock, and then using the value of the stock to justify new loans.

When Enron collapsed and went into bankruptcy, it took the accounting firm of Arthur Anderson with it. Anderson was accused of shredding documents after the SEC began its investigations into Enron’s finances. Criminal charges were filed against more than 30 Enron officials. Ken Lay, Jeffrey Skilling and Andrew Fastow were found guilty of conspiracy, wire fraud and bank fraud for providing deceptive information about the firm to its auditors and investors.

Ken Lay was convicted on nine counts of securities fraud, wire fraud and conspiracy, but died while vacationing in Snowmass, Colorado before serving time. Jeffrey Skilling, the number two man, was convicted on 18 counts of conspiracy and fraud, and is currently serving a 24-year prison sentence. Andrew Fastow, the chief financial officer, pleaded guilty to conspiracy to commit securities fraud, went to prison for a maximum of ten years, and agreed to testify against Lay and Skilling. Lea Fastow, his wife, pleaded guilty to tax fraud and went to prison for six months. Ben Glisan, the corporate treasurer, pleaded guilty to securities fraud and received a five-year sentence. Michael Kopper, an executive, pleaded guilty to fraud and money laundering.

In a lawsuit brought by the shareholders, the former directors of Enron agreed to a $168 million settlement with shareholders, $13 million of which will come from their own accounts, and the rest from an insurance policy.

Dennis Kozlowski, former head of Tyco, and Mark Swartz, Tyco’s chief financial officer, were accused by the federal government of looting Tyco of hundreds of millions of dollars, largely by awarding themselves stock options without approval of Tyco’s directors, and by spending corporate money for personal lifestyle expenses. Kozlowski was found guilty on 22 counts of grand larceny, conspiracy, securities fraud and falsifying business records. He was sentenced to eight years in prison, and Swartz was also found guilty.

Worldcom played a different game: manipulating the quarterly financials by recognizing phantom income or pre-paying expenses in order to smooth out the Company’s quarterly results. Furthermore, it came to light that MCI-WorldCom had lent Chairman and CEO Bernie Ebbers more than $400 million in off-balance-sheet loans. When WorldCom went bankrupt, it was the largest bankruptcy in U.S. history. Bernie Ebbers was found guilty on nine counts of conspiracy, securities fraud and filing false reports with regulators. He was sentenced to 25 years in prison. Ten of WorldCom’s former directors agreed to pay $18 million from their own pockets as part of a $54 million settlement with their shareholders.*

Contrast the treatment of these scoundrels with that of their counterparts in Mexico. What is missing in Mexico’s frequent delitos is the regulatory crackdown from the federal level and the use of the court system to recover stolen money. Why? This is the question for which I have no answer, except to suggest that Mexico’s legal system simply does not function.

It’s not that Mexico does not have pressing needs for more revenue. The country pays its teachers poverty wages. It cannot provide clean drinking water and sewer treatment plants to most of its cities. Here is a blurb on the environment from the World Fact Book, online:

Source: https://www.cia.gov/library/publications/the-world-factbook/print/mx.html

If that is not convincing, consider that according to the Secretary of Communications and Transport (Secretaría de Comunicaciones y Transportes) 30% of Mexico’s highways are in poor condition and need repair. As an article in Ocho Columnos (December 23, 2007, front page) put it, if the highways were tested, 30% would fail.

Even Pemex itself has infrastructure issues. It badly needs to channel investment into its ageing system of piping and refining. It would do Mexico a great service to upgrade its refining capabilities so that it could export value-added products such as jet fuel, rather than just a raw commodity (crude oil). They need to find new oil fields as old ones are depleted. This is especially important since Mexico’s oil production peaked in 2004, and has been slowly dropping toward the 3 billion barrel per day mark.

This requires the dedication of the Pemex directors to spend money on developing such projects and upgrading failing infrastructure – not spending their time trying to figure out ways to siphon funds from their own budget.

December 2007

*For a wider discussion of greed and corruption during the tech boom of the 1990s, along with an interesting discussion of Mexico’s currency crisis of 1994, see Charles P. Kindleberger and Rober Z. Aliber, Manias, Panics and Crashes: A History of Financial Crisis (Hoboken, N.J., 2005: John Wiley & Sons, Inc.)