Yesterday Mexico’s Congress took a small step forward to fight corruption in the nation’s energy sector.
The new rules are designed to reduce conflicts of interest involving “independent advisors” (consejeros independientes), energy experts appointed by the federal government to serve on the boards of companies affiliated with Pemex and the Federal Electricity Commission (CFE).
Both state-run energy giants, as most readers know, are well-known for their lack of transparency, lack of accountability and deeply-embedded corruption. Unsurprisingly, these advisors (mostly energy executives from the private sector) have a long record of steering public contracts to their own companies and those owned by relatives, friends, political patrons and clients. Vast sums of money have been earned this way, and many energy VIPs owe their fortunes to well-placed officials.
Under the new system, independent advisors – while serving on the board of a state-run entity – can no longer maintain a “significant commercial interest” in companies that do business with that entity. Nor can they close deals with blood relatives up to the fourth degree of kinship; or charge fees to promote the interests of clients.
Although these changes are a welcome step forward, it will take years (perhaps even a generation) before this new paradigm of ethics is accepted and assimilated by those in power.
Why? First, the meaning of significant commercial interest is still largely unclear under Mexican law. Based on past rulings, “significant” has been interpreted to mean up to 10% of the public entity’s annual revenue, which in this case would be equivalent to hundreds of millions of dollars. Based on this interpretation, the rule in itself is meaningless.
Second, these new regulations will be virtually impossible to enforce, as policing has been delegated entirely to Pemex and CFE. Both entities are mandated to appoint an ‘Administrative Board’ to ‘detect and report’ to their federal overseers any potential conflicts of interests.
In other words, the foxes have been left to guard the hen house.
What the reforms don’t address
Most experts agree that restrictions on independent advisors are long overdue. But in practice, influence peddling by outside advisors represents only a fraction of the graft, profiteering and corruption that permeates Mexico’s state-run energy sector.
As Miguel Alonso Raya, a PRD legislator testified last year at a hearing: “The government picks whoever it wants to govern Pemex, which means that there’s really no way to ensure transparency and fight corruption”.
According to Alonso, the energy reform signed into law by Peña Nieto in 2014 – designed to lure billions of dollars in investment to the country’s ailing oil, gas and electricity sectors – has only made things worse.
He cites the recent investigation by Reuters as an example, which revealed that the Mexican authorities refused for years to heed auditors’ warnings of billions of dollars of dodgy deals signed by the oil giant. Between 2003 and 2012, Pemex signed over 100 contracts worth about $11.7 billion dollars that involved irregularities. These dodgy accords represented 8 percent of its total income during this period, including inflated contracts, ghost employees, payments for services never rendered, extortion, influence peddling and conflicts of interest, among others.
Between 2008 and 2012, the most recent year of available data, auditors issued 274 recommendations that urged Pemex to file criminal charges, discipline employees and try to recover absconded resources. Of these 274 recommendations, 157 were immediately dismissed by Pemex’s internal control office; and 114 were left in limbo, never to be resolved. Action was taken in only 3 cases.
Auditors from the Federal Audit Office, known in Mexico by its Spanish acronym “ASF”, say they have no authority to levy fines or press criminal charges. They can only pass their recommendations to prosecutors or to Pemex’s internal control office.
“In Mexico, no one gets punished,” said Arturo Gonzalez de Aragon, a former head of the ASF. “If you don’t punish anyone, impunity becomes a perverse incentive for corruption.”
The revolving door
Another big question about this reform is why it only applies to independent advisors – in effect, the tip of the iceberg – and not other Pemex and CFE officials.
It’s well-known that energy giants such as Schlumberger, Sempra Energy and Baker Hughes, among others, don’t make a move in Mexico without first recruiting a former Pemex or CFE boss with deep insider knowledge and an extensive Rolodex.
Many examples can be used to illustrate this point. Carlos Ruiz Sacristán, who directed Pemex for a year before joining IEnova (the Mexican affiliate of Sempra Energy), helped IEnova close a multi-billion dollar joint partnership with his former colleagues within months of his appointment. In his second year, IEnova won the Los Ramones gas pipeline contract, one of the largest Mexican energy deals of the last 15 years.
Adrián Lajous Vargas, Pemex director between 1994 and 1999, left the state-run giant to join Schlumberger, where he helped close over $10 billion worth of deals with Pemex-affiliated companies. Luis Ramírez Corzo, who headed Pemex between 2001 and 2004, later helped Caterpillar close over $3 billion worth of deals. (Solar Turbines – a company owned by Mr. Ramírez – received 46% all bids awarded by Pemex Exploración y Producción between 2003 and 2006). Ramírez’s successor, Juan José Suárez Coppel, helped win bids to build 18 off-shore platforms worth well over $2.5 billion for Jacobs Engineering Group, which he joined right after leaving Pemex.
All these men – sworn under Mexican law to avoid “conflicts of interest” – exploited their insider contacts to earn billions for their employers. Yet the vague legal meaning of “conflict”, combined with a business modus operandi that fails to hold executives accountable once they leave the government, resulted in not a single accusation of impropriety.
How will new anti-corruption laws fare once the energy markets heat up?
The privileges granted to ex-energy executives is, of course, a reflection of a wider “culture of impunity” shared by Mexico’s political class in general.
After all, many of Mexico’s richest men have made their fortunes through state privatization. Germán Larrea, owner of Grupo Mexico; Carlos Slim of Grupo Carso; Alberto Baillères of Grupo Bal; and Ricardo Salinas Pliego of Grupo Elektra (among others) have all used their insider contacts to close billion dollar deals with the government. Today they control nearly 10% of Mexico’s GDP – a fact that many economists think has harmed the nation’s interests.
If the door between public and private life is left unchecked, what will happen with energy?
The government points to transparency provisions in the National Anti-Corruption System and the Federal Anti-Corruption Law for Public Contracts that specifically target the energy sector – comparable to legislation in the UK, the US and Canada.
It also highlights two new state bureaucracies – the National Hydrocarbons Commission (CNH) and the Energy Regulatory Commission (CRE) – created to monitor interactions between state-run enterprises – including Pemex and CFE – and private companies. Both are “autonomous” agencies responsible for overseeing state bids, identifying irregular expenditures and preventing corruption schemes.
Yet despite new laws and agencies, the government’s default response to signs of influence peddling by high-ranking ministers is to look the other way. As the Reuters investigation clearly shows, public officials and private companies engage in widespread corruption with “absolute impunity”. Although both the Energy Reform and the National Anti-Corruption System contain carefully-worded provisions designed to prevent graft, neither statute includes measures to ensure that the law will be enforced.
The small step taken yesterday does nothing to change that reality.
For more details, check Corruption in the Mexican Energy Industry:
Recommendations and Proposals, a paper by Gabriel Toledo Guerrero of the Wilson Center and the Reuter’s report, Mexico looks the other way as contractors fleece oil giant Pemex.