The Telmex Case- How the US Loots Mexico''s Wealth

Tony Abdo aabdo at
Sun Mar 25 03:56:16 MST 2001

Bush moved against Latin America's richest man, Carlos Slim, this week,
by threatening to go to the WTO to speed up further, the breakup of
Mexico's telecommunications monopoly.      Carlos Slim had enriched
himself (close to $20 billion) by gaining control over Telmex (the
Mexican telephone system).       This was done through a privatization
pushed for by the US government.

Now, ATT and MCI are counting on the Bush administration to continue
this breakup in their favor.     ATT will accuse (via the Bush
administration) Telmex of being an illegal monopoly!      Of course, ATT
would only be the biggest of a consortium of American telecommunications
firms to benefit from any ruling by the WTO against Telmex..

Below, are two articles about Telmex.      The first, gives some history
of the Telmex privatization.     The second, is the Reuter's news item
about the current Bush attack on Carlos Slim and his Telmex empire.

Tony Abdo
Privatization in Mexico: Telmex

The privatization process in Mexico has been dramatic on a number of
fronts. In terms of its scope, nearly 1,000 state-owned enterprises have
been sold since 1983. This divestiture, however, rather than leading to
increased competition and economic efficiency, has led to a striking
increase in the concentration of assets and income, as well as in the
penetration of strategic sectors of the Mexican economy by foreign
investors. These issues are particularly salient in the case of
Teléfonos de Mexico, or Telmex, the national telephone company.

The Mexican privatization program began in the wake of the Mexican debt
crisis in 1982. In November of that year, the government signed a Letter
of Intent with the International Monetary Fund (IMF), which conditioned
IMF lending on reductions in government expenditures (especially cuts in
investment and real wages in the public sector), increases in taxes and
public-sector prices, and privatization.1 The implementation of that
program was followed by a series of loans from both the IMF and World
Bank geared both to promote production for export to earn foreign
exchange and to create optimum conditions in Mexico for foreign

The privatization program has been rife with controversy. In 1988, the
government responded to a strike by Aéromexico workers by shutting
down the airline, firing all 12,000 workers, and selling off the
company. Similar actions were taken in the privatization of the copper
company. These actions are partly responsible for there having been
little subsequent opposition to the privatization process from organized
labor. The fact that Telmex workers have remained relatively quiet on
the issue can no doubt also be explained by the fact that they received
a 4.4 percent share of the privatized company.2 Also, since Telmex
remained a monopoly until this year, there has been little pressure for
job or wage cuts so far.

On the other hand, a number of unions and civil-society groups joined
together in 1996 to protest the sale of Petróleos de México, the
state-owned oil company, forcing the government to revise its
privatization plans. Even the World Bank has admitted that the
privatization of state companies has exacerbated the concentration of
wealth and led to an increase in private monopolies. In a 1991 internal
audit report, it acknowledged that "there has been a worsening of the
already skewed and concentrated pattern of ownership distribution in the
economy and an increase in vertical integration.

Only a small group of local conglomerates have been involved in
purchasing public enterprises." In fact, the assets of Carlos Slim,
Mexico's richest man and a new owner of Telmex, total more than the
annual income of the poorest 17 million Mexicans combined. During the
Administration of President Carlos Salinas de Gortari, the number of
billionaires in Mexico rose from 2 to 24.3
The Telmex Connection Carlos Salinas announced his intention to
privatize Telmex during his 1988 presidential campaign. It was in some
ways a surprising decision, since the phone company was experiencing
healthy profits and had embarked on a new investment program. A World
Bank report on the Telmex sale speculated that "Telmex was chosen partly
for its symbolic importance and partly as a potential source of a
sizable amount of revenueThe privatization of Telmex would dramatically
serve notice that Mexico was serious about privatization and the
development of the private sector."4 The Bank was serious about
privatization, too. It provided a US$500 million loan to Mexico in 1989
to reduce the "heavy burden PEs [public enterprises] impose on the
economy" through their sale, liquidation, and merger, followed in 1990
by a US$22 million tehnical-assistance loan to accompany the Telmex
sale.5 Prior to that sale, the government sweetened the deal by
drastically raising telephone-service prices to consumers. In January
1990, it eliminated an indirect tax on telephone services and permitted
Telmex to absorb the remaining taxes into its prices, which were allowed
to rise substantially. The charges for measured local calls, for
example, increased from 16 pesos per minute to 115 pesos per minute.6 At
the time of the privatization the Mexican government owned 56 percent of
Telmex's stock. The remaining 44 percent was publicly traded on the
Mexican stock exchange. The government officially announced its
intention to sell 51 percent of the voting stock (20.4 percent of total
stock) in the company in September 1989 and received bids in November
1990. The winning bidder was a consortium led Carlos Slim's Grupo Corso,
which, in December 1990, purchased 51 percent of the stock sold;
Southwestern Bell and France Telecom each bought 24.5 percent of the
voting shares sold. The total sale price was US$1.67 billion. The
government sold additional shares in 1991 and 1992. Together with the
1990 sale, it received US$6.2 billion for the Telmex stock.7

Winners and Losers Telmex's stock prices increased considerably after
the sale. While many financial analysts attribute the rise to improved
efficiency at the company, the price hike clearly played a big role, as
well. In its 1992 report on the Telmex sale, the World Bank estimated
that the biggest losers from the privatization were consumers, who were
worse off by 92 trillion pesos (US$33 billion). The government, domestic
shareholders, and employees gained 16, 43 and 23.5 trillion pesos,
respectively. The biggest winners by far were foreign investors, who
gained 67 trillion pesos. In fact, foreign investors captured 90 percent
of the net benefits from the sale. The report concludes that, "the
privatization of Telmex, along with its attendant price-tax regulatory
regime, has the result of `taxing´ consumers -- a rather diffuse,
unorganized group --and then distributing the gains among more
well-defined groups, [foreign] shareholders, employees and the
government."8 The authors projected, however, that in the long run
consumers would benefit from reduced prices.

The "long run" appears still to be a ways down the road. According to
Mexican economist Rocio Mejia, "consumers have found no improvements in
the cost or quality of their telephone service." In fact, Mejia notes
that, while international long-distance charges dropped 10-15 percent in
1996, Telmex increased the prices of national long-distance services by
an equivalent amount.9 This trend is likely to continue into the future.
Telmex's monopoly on both domestic and international long-distance
services ended in January 1997. While Mexican investors must still
maintain a controlling interest in the new long-distance companies, they
have attracted a great deal of interest from U.S.-based companies. AT&T,
MCI, GTE, Sprint, Motorola, Teleglobe and Bell Atlantic have all formed
alliances with Mexican partners to enter the US$7 billion market. While
Telmex's prices will continue to be regulated for the next six years,
the new competitors are free to set their own prices. The government
claims it will continue to subsidize rural telephone services,10 but in
a time of continued pressure from the IFIs to hold down government
expenditures, that may be a difficult promise to keep.

Written April 1997, by Karen Hansen-Kuhn, The Development GAP.

U.S. still waiting for Mexico to open up telecoms
21 Mar 2001 02:40

MEXICO CITY, March 20 (Reuters) - The United States said on Tuesday it
was still waiting for Mexico to open its telecommunications market and
has not ruled out taking the dispute to a World Trade Organization (WTO)
U.S. Commerce Department officials met on Tuesday in Mexico City with
representatives from Mexico's Ministries of Finance and Communications,
as well as with officials from telecoms watchdog Cofetel.

"Today's meeting we found very useful," a Commerce Department official,
who asked not to be named, said in a briefing with reporters. "They did
share some information that allows us to understand the state of their
current initiatives."

The official said, however, the U.S. remains "seriously concerned" about
some key issues. These include compliance by Mexico's telecommunications
giant, Telmex  , with Cofetel regulations designed to reign in its
dominance, and still high international interconnection rates.

The United States charges that Telmex uses its dominant position to
restrict competition in Mexico's $12 billion telecommunications market.

"We are looking to see how quickly Mexico is going to move to make sure
that they are abiding the WTO commitments," the Commerce Department
official said.
If the United States finds that progress is not being made toward
opening Mexican telecommunications, it has not ruled out seeking a
hearing before a WTO Dispute Settlement Body panel to resolve the
conflict, the official said.

In January the administration of former President Bill Clinton welcomed
an agreement reached by Telmex and long-distance rivals Alestra, 49
percent owned by AT&T Corp. , and Avantel, part-owned by WorldCom Inc.
on pending debts, interconnection rates and other points.

But the United States has said it was not ready to drop its WTO
complaint against Mexico.

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