Taxpayers in Mexico Brace for a New Round of Plunder
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
How the mighty are fallen. Pemex, Mexico’s state-owned oil giant, once a goliath on the global energy scene, is now dependent on state aid to meet its day-to-day needs. Mexico’s Finance Ministry announced a series of measures aimed at loosening Pemex’s financial strains, giving the state-owned giant a decidedly short-term $4.2 billion liquidity boost.
That includes a capital injection of $1.5 billion, as well as a credit facility for a further €2.7 billion to pay down pension costs this year. The company will also receive tax breaks that will allow it to deduct more of its exploration and production costs.
But it’s a mere drop in the barrel compared to the $30.3 billion in losses the company racked up last year, its $90.5 billion in pension liabilities, and its debt which is expected to surpass $100 billion later this year.
The Markets were thrilled by the announcement.
“This is good, because it is comprehensive and it deals with the main issues,” said Alexis Milo, an economist at Deutsche Bank in Mexico City. “The reaction of markets will be positive because this is the beginning of the structural changes that markets were expecting.” As soon as the news broke, Pemex’s CEO and Mexico’s Finance Minister were on a plane to Wall Street to try and drum up investor support for the ailing oil company. Now they know that Mexico’s taxpayers have Pemex’s back — at least for now — investors are likely to view the company more favorably.
Mexico’s taxpayers are unlikely to be quite so enthused by the news, especially given the prospect of this being just the beginning of a growing trend. According to Mexico’s Business Coordinating Council, Pemex doesn’t just have temporary short-term liquidity problems, as the Finance Ministry contends, but is suffering from a structural deterioration that poses a serious threat to its long-term viability.
This deterioration is the result of “decades of bad management, lack of vision, negligence, abuse and in many cases, corruption.” The Mexican daily La Jornada went further, arguing that the company has been systematically “plundered” during successive administrations, including, of course, the current one.
The Three Plunderers
There are three prime agents behind this plunder. The first is the company’s burgeoning ranks of senior management and administrators. In the last four years alone their number has tripled. Despite Pemex’s growing losses they have awarded themselves generous salary rises and lucrative perks, including three executive planes, a helicopter, and 911 company cars and SUVs.
The second group of plunderers are the untouchable, unsackable leaders of Mexico’s oil workers’ union. At the top of this group is Carlos Romero Deschamps, a man who was prominently featured in Forbes’ 2013 ranking of the 10 most corrupt people in Mexico. Despite earning a monthly salary of just $1,864, Descamps was able to gift his son a $2 million limited edition red Enzo Ferrari. According to political analyst Denise Dresser, in 2011 alone he received $21.6 million for “aid to the union executive committee” and $15.3 million from union dues.
In 2013 the Mexican daily La Vanguardia revealed that Deschamps’ sister, brothers-in-law, and an assortment of nephews, nieces and cousins were all on Pemex’s payroll, with contracts guaranteed until the year (and this is no typo) 2999. None of them appeared to actually do any work for Pemex.
Deschamps is one of scores of senior union officials bleeding Pemex — and by extension, Mexican taxpayers — dry to the bone. None of them are under investigation by Peña Nieto’s administration. In fact, most of them are highly connected, card-carrying members of Peña Nieto’s own party, the Institutional Revolutionary Party (PRI), which has held power in Mexico for 75 of the last 87 years. Deschamps himself is now a PRI senator.
The third group of plunderers are the legions of Pemex contractors that have been flagged up by auditors for serious accounting abuses or irregularities. A special Reuters report last year showed that from 2008 to 2012 congressional auditors issued 274 recommendations that Pemex take serious action over contract irregularities – meaning it should either press criminal charges, discipline employees or claw back money. “The company issued responses to 268 of the cases, but in only three of them was action actually taken.”
Reuters identified more than 100 Pemex contracts signed between 2003 and 2012, worth $11.7 billion, that were found to have serious problems by the Federal Audit Office of the lower house of the Mexican Congress. In some cases the work was never even done; in one case the contractor who received the funds was a notorious drug trafficker. In total, the shady deals equate to approximately 8 percent of the $149 billion in Pemex contracts registered in Mexico’s federal contracting database in that period.
“In Mexico, no one gets punished,” said Arturo Gonzalez de Aragon, a former head of the Federal Audit Office, known in Mexico by its Spanish acronym, ASF. “If you don’t punish anyone, impunity becomes a perverse incentive for corruption.”
A Stark Contrast
In recent months a huge media spotlight has been trained on Brazil, where serious efforts — albeit partially politically driven — are under way to root out the rampant corruption affecting both the executive and legislative branches of government as well as the state-owned oil company, Petrobras. Some of the country’s richest and most powerful figures, including billionaires, have been hauled off to jail for bribery, money laundering, tax evasion, and corruption, and sentenced to multi-year prison sentences.
In Mexico, by contrast, corruption is more pervasive and than ever. Both Mexico’s President Enrique Peña Nieto and the government he heads have been mired in one corruption scandal after another, with zero consequences. Nor was it much of a surprise that when the government introduced sweeping new energy market reforms in 2014, it barely touched upon the issue of Pemex’s rampant culture of corruption.
That same government has just injected over $4.2 billion of taxpayer funds into Pemex, which is now a sinkhole of both corruption and debt. That money will not be nearly enough to stop the rot, especially if large parts of it are siphoned off by crooked contractors, executives, unions, and politicians. In the most perverse of ironies, the more money that goes AWOL, the more taxpayer funds will be needed to plug the gaping gaps, which will present even more opportunities to plunder Pemex. By Don Quijones, Raging Bull-Shit
It was just a matter of time before Pemex began dragging down the national economy it had sustained for over 75 years. But now a nightmare is coming true. Read… Debt Spiral Grips Both, Pemex and Mexico
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.