15 minutes with ... Luis Tellez: energy secretary turned business executive talks about reform, China threat.

Floundering energy reform, growing trade competition from China and the commercial relationship between Mexico and the United States were a few of the topics addressed in a wide-ranging August interview with former Energy Secretary Luis Tellez, now an executive at Grupo Desc, one of the nation's top 25 companies.

At his top-floor office in the posh Santa Fe area, the Ph.D. in economics graduate from the elite Massachusetts Institute of Technology didn't mince words when he blamed the lack of reform on "political ideologies" and called the government's ability to distribute energy better than private companies "a myth."

From your perspective, what is currently happening with the energy reform?

Well, I haven't been involved in energy reform for about two years. I can tell you that what the (Ernesto) Zedillo administration proposed was a complete deregulation of the energy sector. That deregulation implied the CFE had to be divided into different production generating companies and that different distribution companies had to be established. The idea was that these would be privatized and the government would retain the transmission lines and have control of the electricity system: and, of course, we would have a strict regulatory framework in place.

I am confused as to what the energy reform proposal currently is. There are several reforms that have been drafted, some of them by the government, other ones by the different parties. The problem is that everyone talks about energy reform, but no one is clear about what the reform means. And I can assure you that different people have completely opposite views of what the reform means.

You talked about this confusion regarding this type of reform. On whom do you place the blame for that?

I don't put the blame on anybody. I just think the different positions need to be outlined and there are some voices that are against the reform but don't even know what the reform is about. I do follow the press very closely on this issue and the only discussion is a binary one about whether there is or is not reform.

There is not a discussion about the substance of this reform. And we could have the worst outcome of all, which is a very light reform that would not bring private investment into the electricity sector ... The overall Mexican savings rate is not enough to finance growth in the energy sector, and at the end of the day we could have a reform where nothing happens. So, I think the responsible discussion is not just where there is or isn't reform but also what the different types of reform imply.

Is it clear to you what the Fox administration's proposal is? I have some idea, but I am not very familiar with it.

Why hasn't Congress taken up this issue and been more forceful in wanting to pass it?

Because it has become an ideological issue when it shouldn't be one. Producing electricity is like producing any other good. The issue is that it's a basic input of the economy. All over the world this is true. No matter what people say, electricity sectors have been deregulated in one way or another.

There are very few countries that have an electricity monopoly. Even France has opened up its electricity market to competition from other EU members, and the French were, of course, very proud of their electricity monopoly. I think Mexicans should look at the issue from a point of view of efficiency, long-term growth and opportunities for the country.

In an interview last month with BUSINESS MEXICO, political analyst Sergio Sarmiento said given the past elections the PRI (Institutional Revolutionary Party) is now the key to passing reforms. Do you see the PRI as an obstacle to these reforms?

No, I think the PRI is a very constructive political force, although there has to be a discussion within the PRI of what they want in terms of the reform.

Speaking about these last elections, how do you feel about the outcome?

That was expected, and anybody who had seen a decent poll expected that outcome ... I think the important thing is in order for the country to move forward the executive branch and the political parties must have the consensus-building capacity and understand that Mexico is lagging behind the rest of the world in many areas. That's not just a theoretical statement.

That can be seen in the fact that some of the big companies that had assembly plants in Mexico are divesting from Mexico, that the rate of foreign investment in China has increased enormously and it's dropping in Mexico. The world is moving, and we cannot stop the country for three years. That would be completely irresponsible. So, I do think the government has to move forward in terms of consensus building, and the parties also have to be flexible (in terms of) the benefits for Mexico and Mexicans.

When you say the government, are you talking about the Fox administration, Congress or both?

I say both have to move forward.

Do you see any significant energy reform happening before Fox leaves office?

I don't know. It's a very good question. I think there should be an energy reform. The big problem with energy is that Mexico is the only country with a comparable per capita level and overall GDP figures that has two monopolies in control of the supply of the basic energy inputs of the economy.

We have a monopoly in hydrocarbons and we have a monopoly in electricity. And, of course, monopolies are not efficient, less so if they are run by the state. It's a complete myth that the state can run it better than the private sector. So, monopolies are not good for the economy neither in the private nor public sectors. If this doesn't change, Mexico will be lagging behind.

As former Energy secretary, how would you rate your successor Ernesto Martens? What kind of job has he done?

He has done a very good job. He has put forward the need for energy reform. He has achieved several objectives in the running of the energy sector like increasing investment in Pemex and the CFE. The El Cajon project is an important one and probably the last hydroelectric project Mexico will be able to do and he did it. So, I think he has been a very good public official.

A lot of people argue that the electricity and oil industries are part of national security and that's why they should not be privatized or handed over to foreign investors. Do you buy that?

No, I don't buy it ... I would say they are part of the national security story in terms of having the adequate and efficient supply and at the correct prices. Electricite de France provides electricity for most of London's metropolitan area, and the French and the British have been allies for some time but were enemies during the 19th century. It doesn't have anything to do with national sovereignty.

The problem with national sovereignty and electricity is that if we don't get an efficient supply of electricity and fossil fuels, the economy will not be able to grow. That's a very strong statement, but I can support it with facts and that would mean losing sovereignty because we won't be able to increase employment, bring in investment, bring in foreign savings into Mexico. So, I think it's the other way around.

I don't think we'd lose an inch of sovereignty if electricity (were privatized). If we had a well-run market of electricity and if the prices of electricity decreased by 20 or 25%, Mexico would then become an interesting place to invest.

Recently high officials in Pemex were exonerated of funnelling money to the Labastida account during the last presidential campaign. As a former Energy secretary, how rampant would you say corruption is within Pemex?

I am not going to answer that question.

How could Mexico avoid the foreign domination of its energy sector or is that even a concern?

The issue here is people don't understand. When the public discusses a foreign domination of one industry or another, it's not a foreign domination as if the British would come in and take over the energy industry. What happens is that companies who have their headquarters in other countries would come and establish themselves in Mexico. They can be regulated by the Mexican government, and they have in their code of ethics and their charters adherence to the laws of the land where they are operating. So, I don't think there is any problem whatsoever.

We have had important investment in electricity from Spanish companies, and we haven't given an inch of sovereignty to Spain or to U.S. or Canadian companies. Actually, companies are not coming to invest in Mexico, because everything is too regulated to do business. So at the end of the day, there won't be any business coining.

Speaking hypothetically, if the energy sector were deregulated to some extent, what role might Grupo Desc have in that?

We don't know. I mean, it's a long way off. Desc is an important consumer of energy. Of course, we are always looking at the best possibilities we have to consume electricity at a low price ... Desc was a partner in InterTech's venture in Altamira, and we will always keep looking at different issues.

Certain areas of the oil industry, are off limits to foreign investment ...

Not certain areas, all areas of the oil industry are off limits to private investment.

OK, and (so is) the electricity industry and yet private companies can mine minerals, like silver and gold, as much as they want. Is that hypocritical?

No. I don't think anyone uses gold to produce anything except very specialized things, but hydrocarbons and electricity are used to produce everything. So, that's why it is a topic different than that related to minerals. But I do think the government has the capacity to produce the proper regulations to let the private sector in.

I would tell those who are opposed to it that in the United States even though there was a problem in California two years ago, things are moving in the way of letting markets operate with better regulations. Of course, there have been mistakes. Electricity is not a simple good, and the trading of electricity is a very complicated issue but it can be done and it is being done.

Changing topics now, how do you see trade and commercial relations between Mexico and the United States right now?

I think we have some difficult topics. First of all, I think Nafta has been a huge success in terms of Mexican imports and exports.

The advantages we have with Nafta are slowly eroding because of the tariff decreases that have taken place within the World Trade Organization and with the entrance of China into the WTO. So, I think Mexico has to do everything within its reach to make its economy more competitive. Of course, within this very important trade relationship (with the United States) of almost US$300 billion there are some issues, which are an irritant for both counties, like the sugar sweetener issue, but I think those are minor issues compared to what has been achieved.

The Partnership for Prosperity program is looking to create economic development in certain areas of Mexico where Nafta hasn't been quite as present and they just had their annual meeting this past summer. What are the chances of that program having a significant impact on Mexico?

I think the impact on Mexico will come from foreign investment, but the less developed regions of Mexico are badly in need of proper infrastructure. I mean if you don't have proper infrastructure in terms of roads, railroads, educated people, trained technicians and so forth, nobody will establish an industrial plant in those areas. So, there is a role for the government to play in both bringing in the proper infrastructure, and there is an important role for the federal and state governments to promote investment and give proper incentives for investment to establish itself in those areas.

You mentioned China's entrance into the WTO. Despite the integration of Canada, the U.S. and Mexico through Nafta, how much of a commercial threat is China to Mexico?

I think China is an important commercial threat to Mexico and that's why I would like to emphasize once more that Mexico should do everything within its reach to make our country competitive. One of those areas is energy, of course.

What steps can the Mexican government or Mexican industry take to ward off the threat of increased competition with China?

One of them, of course, is reforming those areas where we still have monopolies, be they public or private monopolies. One of the advantages we clearly have is that we have very good engineers and very good technical people and more money should be put into education.

The rule of law is something which is extremely important and that linked to property rights is something that is key. So, I think there are many things the government could do but it won't be finished in three, six or 10 years. It's an ongoing process.

Looking more positively at this China threat, what advantages does Mexico have?

We have the closeness to the U.S. and lower transportation costs. People are more familiar with doing business in Mexico than in China. Many U.S. Fortune 500 companies that have not have done well in China went to China because it's a fad to go. We have intellectual property right laws and enforcement. We would like (them) to be stronger, but it's being done.

We have very well-trained people. Of course, if you compare the number of engineers China has it's larger than Mexico, but per capita we have more. We have a very well-educated labor force in certain areas of the country, unfortunately in certain areas we don't.

We also have an important pool of managerial talent, which can be used to manage Mexican operations. In 90% of the operations Desc has with partners, the Mexican facilities are the most efficient in the world. So, I think Mexicans are very good and efficient workers. We are still in the race, but we need to speed up to win and bring in foreign investment.

Armando Saliba is the associate editor of BUSINESS MEXICO.