Earlier this month, president Andrés Manuel López Obrador (AMLO) gave a speech at the annual convention of the Mexican Banking Association (ABM) where he said that his administration was “in favor of business being done in Mexico within the framework of the law and with reasonable profits”. There is no doubt that Mexican business activities (just like government actions) must be carried out within the framework of the law. However, the idea that there should be such thing as a “reasonable profit” leads to arbitrariness and false accusations.
An example of the latter occurred last week when AMLO lambasted Mexican convenience store chain Oxxo and Mexican bakery company Bimbo for allegedly paying less for electricity than a “corner store”. The reality is that both companies pay less than they would if they bought power from state-run utility CFE. Oxxo and Bimbo invested in having access to clean and cheap electricity sources. It must be said that both Oxxo and Bimbo continue to pay CFE for transmission and distribution of power through its network. A reasonable Mexican government would push for all consumers to have access to these clean and cheap energies. This stands in contrast to AMLO’s own energy policy.
There is no way to determine what constitutes reasonable profit. Within a well-regulated market economy, the goal should be rather to have institutions that foster competition, so that no powerful official nor a hegemonic businessman can decide the prices of goods and services. In a competitive market economy, if a player profits handsomely, it is due to his efficiency. In the Mexican electricity market, there are private companies that have posted high earnings, thanks largely to CFE’s high costs.
AMLO has not shown any evidence of corruption in the awarding of contracts to private companies for connecting to clean and cheap electricity sources. However, the president made evident two of his great flaws. One, the belief that energy profits cannot go to private enterprises. Second, his anger toward those he views as his enemies. One example of the latter is Iberdrola, the Spanish energy company. More than a decade ago, Iberdrola became AMLO’s perceived foe (and surely a corrupt entity according to him) upon its appointment of former president Felipe Calderón to its board.
Private investment in the Mexican electricity market could have yielded losses if the new plants had been poorly designed or packed with workers with steep pensions, like in CFE. Should the government pay compensation to private companies in the absence of reasonable profit? Of course not. But if the government changes the rules of the game and affects past investments it will have to do so. This is true given the new commitments made by the López Obrador administration in the new USMCA trade deal. Upset by “excessive profits”, the Mexican government will thereby end up paying hefty compensation.
AMLO is so annoyed by what he perceives as unfair profits by private companies that he does not seem to care about the cost of fighting them. Mexico’s medicine distribution system for public hospitals is a case in point. Early in his term, the president did away with the long-running drug procurement and distribution network for public hospitals because he viewed it under the control of presumably corrupt companies that earned unreasonable profits. However, there does not seem to be any criminal charges filed against the companies involved in the alleged acts of corruption. Moreover, the AMLO administration has failed to put a working system in place that can distribute medicines to public hospitals and clinics. According to Cero Desabasto, an NGO umbrella group, there were twice as many complaints of medicine shortages in 2020 than in 2019, which was already a worse year than in 2018. Mexico has ended up buying such drugs at even higher prices. One example: the tenfold growth in price of Midazolam recently bought in Lithuania.
What the López Obrador administration should be concerned about is the unreasonable losses of public owned companies. In an article published by oil industry analyst David Shields last week, oil refining accounts for 45 percent of the losses of state-owned oil company PEMEX’s losses. The company loses 12 dollars on every barrel of crude oil it processes. AMLO’s goal: to process even more.
If the president were concerned about the state-owned companies’ unreasonable losses (CFE’s and PEMEX’s) instead of going after the private sector to make reasonable profits, the country would see more growth and public finances would be healthier. In this potential scenario, the Mexican government would have greater leeway to achieve its lofty goals, like a country with fewer poor.
But that would involve having a Mexican administration that opted to base its governing decisions on the most reasonable option and with the national interest in mind.
* Carlos Elizondo Mayer-Serra is professor at the School of Government and Public Transformation at Tec de Monterrey, in Mexico City. A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition. Twitter: @carloselizondom