Thoughts on the Mexican Privatization Experience
Aspe, Pedro, The McKinsey Quarterly
An excerpt from Economic Transformation the Mexican Way
MEXICO BEGAN TO DIVEST itself of public-sector enterprises in 1983. The Mexican authorities saw privatizing small public-sector entities as a way both to correct -- permanently -- public-sector finances and to improve productivity. This effort has continued with added intensity during President Salinas de Gortari's administration with the completion of larger and substantially more complex privatization operations.
During the last nine years, the government has divested itself from practically all areas of economic activity: sugar mills, hotels, airlines, telecoms, banking, and steel. Of the 1,155 firms under state control in 1982, Mexico has privatized 905 with sales totalling US$14.5 billion, or around 5 percent of GDP. Another 87 are now under way. By the end of 1991, Mexico had transferred 250,000 employees to the private sector.
Before I discuss the specific approaches we took to privatization in Mexico, let me say a brief word about the micro- and macroeconomic factors that shaped what we did.
Privatization does not focus just on the sale of a public entity. It also means looking at how the enterprise will be sold, how it will operate under private ownership, and which economic principles will govern both its sale and later operation. Questions will arise: Should an enterprise be sold through private placements or public auctions? What kind of sale will best achieve the government's objectives? Should the goal be liquidating, merging, or breaking up the enterprise? Should it be transforming it into a regulated monopoly? Should it be developing franchises to run separate pieces of the original business?
There will also be questions about how competition and regulation will affect things after the sale. When planning a sale, for example, a government must consider the potential consequences and so design the sales scheme that the new private owners can manage the firm effectively -- and that, whenever possible, the firm will operate in a competitive environment. If this latter is not possible, the government should develop regulations to ensure efficient resource allocation.
The privatization process, as well as the laws that accompany it, should make it possible for a strong, central board of directors actively to monitor the work of management. Dispersed shareholding can lead to less-than-optimal monitoring. Individually, small investors expend lots of energy monitoring performance, but have no leverage over management. Equally important, because multiple shareholders cannot easily share their knowledge, they usually end up duplicating one another's monitoring efforts.
Next, as authorities encourage capital markets to develop, they must also introduce new regulations on takeovers and holding companies. Only if these are both in place will takeovers not introduce financial instability. Most practitioners accept that, within suitable guidelines, takeovers generate incentives for good managerial performance. Unfortunately, in developing economies, the culture and institutions necessary to provide such guidelines scarcely exist. So the authorities should use the privatization process to help local participants learn more about takeovers and corporate finance, as well as to develop a local capital market. Whenever possible, for example, they should use the local stock market to carry out privatization operations.
Another key point: the mechanism of bankruptcy has to work properly. This may seem obvious to countries with extensive market experience. But it is not always obvious to others. Because, in times of crisis, the Mexican government often bailed out large private enterprises, the risk of going bankrupt had little effect on business managers' behavior. Privatization, then, should not simply re-establish the status quo by nationalizing inefficient private firms. …