Camping in PEMEX grounds; breaking a taboo.

Excelling corporate governance and board arrangement at Pemex

This article is the fifth of a 5-part series on Mexico’s Energy Reform. Return to the main article here.

It is expected that stable, predictable, and efficient public policies contribute positively to the creation of value by a National Oil Company (NOC) as Pemex[1]. However, in the case of Mexican energy delimiting the policy-making, regulation, investment budget control and accountability were threateningly intertwined. In 2008, a new institutional structure for oil and gas in Mexico[2] brought progress on transparency and corporate governance, nonetheless the country is still in the lowest half (25th to 50th percentile) among all countries in the world (cf. Figure 1). The company-government agency duality results in Pemex being over-employed and being relatively inefficiently managed. Hartley & Medlock’s analysis (2011) suggests that Pemex would have been able to earn more than 48% additional revenue, on average, in each year by more efficiently employing the resources at its disposal. Similar issues are presented in the power sector. The Comision Reguladora de Energia (CRE) has principle regulatory oversight of the electricity sector, but does not have direct jurisdiction over CFE.

Figure 1. Country’s Percentile Rank (0-100) in 2011. Source (Kaufmann, Kraay, & Mastruzzi, 2010)

Improving Pemex’s and CFE’s corporate governance, transparency and accountability would result in enhanced economic welfare. Since Pemex must give a large portion of its revenues to the government—62% in 2006 (Solache, 2007), offering greater financial flexibility when setting of budgetary priorities and planning, would result in higher cash flow available to allocate to upstream investments, positively affecting the economy by diversifying the energy mix, improving Mexico’s energy security and accessing harder-to-extract oil and gas reserves. Also, independent boards of directors are thought to be more effective in sheltering the NOC from political interference, allowing it to focus on achieving its goals (Tordo, Tracy, & Arfaa, 2011). Strengthening accountability for efficient operation will facilitate risk and profit sharing with other companies to ease access to technologies, and its ability to make efficient use of assets and employees.

The social welfare could be also be benefited by a new transparent and accountable arrangement because the oversight would avoid corrupted management[3] and ensure correct resource allocation, thus the company would ensure a higher quality service. This policy recommendation could progressively interact with a partially privatization of Pemex, since they would be both subject to market scrutiny and are less exposed to political influence. Privatizations in Latin America have been accompanied by large-scale corruption during the sale of the state-owned companies in the past. Those with political connections unfairly gained large wealth, which has discredited privatization in these regions. Thus, corporate governance and clear regulation could be seen as a prerequisite for partial privatization. Financial transparency and regular audits allow the state to secure its interests (that is, avoid rent absorption) without excessively reducing the autonomy of Pemex.

This energy reform has to be put in place simultaneously with several other policy recommendations to face up the energy taboo in Mexico, go to the main article of the series.

[1] Its Corporate governance is established by the Mexican Congress as a Public Limited Company wholly owned by the state. The BOD consists of 15 members. The President of Mexico appoints 6 government officials and 4 professional directors to the BOD. The Petroleum Workers Union appoints the remaining 5 directors. The President of Mexico also appoints the Director General of Pemex. The Ministry of Energy (SENER) exercises the ownership rights of the government.

[2] Pemex gets its annual budget from the finance ministry and Congress, the Ministry of Energy determines the policy and strategy, the National Hydrocarbons Commission regulates and Pemex operates.

[3] Opaque and inefficient corporate governance mechanisms hinder NOCs’ ability to create value, and in some cases facilitate the development of corrupted practices. (Tordo, Tracy, & Arfaa, 2011).

Share & Vote

Comments are closed.