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GENERATING PARTICIPATION AND DEMOCRACY:
AN ILLUSTRATION FROM ELECTRICITY REFORM IN MEXICO
J. Robert Branston (University of Bath and L’institute)
Roger Sugden (University of Birmingham and L’institute)
Pedro Valdez (University of Birmingham and L’institute)
James R. Wilson (University of Birmingham and L’institute)
Forthcoming in the International Review of Applied Economics, 2006
We are grateful to Keith Cowling, Johan Willner, two anonymous referees and the Editor for discussion and
comments. We also acknowledge helpful comments on an earlier version by participants at the 5th Annual
Conference of the European Network on Industrial Policy (EUNIP), Vienna, November 2001 and at the 2002
L’institute-Ferrara Graduate School in Industrial Development Policy. The responsibility for errors, however, is
entirely our own.
Authors addresses’:
J. Robert Branston: mnsjrb@management.bath.ac.uk
Roger Sugden: R.Sugden@bham.ac.uk
Pedro Valdez: pvaldez@planetfinance.org
James R. Wilson: J.R.Wilson.1@bham.ac.uk
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GENERATING PARTICIPATION AND DEMOCRACY:
AN ILLUSTRATION FROM ELECTRICITY REFORM IN MEXICO
ABSTRACT
Privatisation is a fundamental issue for both ‘developed’ and ‘less developed’ countries. Many see it
as a requirement for access to a globalised economy, and furthermore imply that countries have no room for
manoeuvre when it comes to ensuring that privatisation takes place. However, we would argue that a mere
requirement leaves options for how privatisation is to be undertaken. We consider the possibility of an
economy developing according to the aims of its people, and correspondingly of a privatisation model that
contributes to the nurturing of democratic economies. How this might be achieved in practice is addressed by
using the specific case of electricity in Mexico as an illustration. We explore an ownership and control
structure that balances different interests. It is envisaged that pension funds could be important, linking
investment back to individuals and groups with interests wider than those usually associated with international
investors. While this could move towards the guiding principle of democratic control, it would fall short of
being fully inclusive. Therefore a more direct incorporation of citizens, through a formal right to participate in
strategic decision-making, is also contemplated. Various governance mechanisms are identified that, with
further refinement and positioning in the context of particular cases, might allow effective participation to be
realised.
Keywords: Privatisation, Economic Development, Electricity, Democracy, Mexico
JEL Classification Codes: D70, L33, L94, O10
1
1. Introduction: Pressure to Privatise
Privatisation is a significant concern for many ‘developed’ and ‘less developed’ countries. This is
largely because influential institutions and organisations see it as a requirement for participation in a (certain
sort of) globalised economy. Indeed, currently there is strong consensus that governments are ill suited to
organising production, even in traditional natural monopoly or public utility industries such as electricity, water
and transport. This view has its roots in British experiences,
1
and is related to the more general drive towards
an integrated capitalist system organised around transnational capital.
There is undoubtedly strong ideological pressure to privatise, reflected in the so-called Washington
policy consensus (Williamson, 1990, 1993) and re-enforced in the case of ‘less developed’ countries by the
conditionality of structural adjustment (Phillips, 1980; Taylor, 1997; Stiglitz, 2002). In many cases, this
pressure leaves no room for manoeuvre for governments in ensuring that privatisation takes place. For
example, Nochteff & Abeles (2002, p.69) argue that the Argentinean government faced a ‘desperate political
and ideological urgency to privatise and deregulate’, pressures that have also been revealed in South Africa
despite the absence of explicit structural adjustment conditionality (Michie & Padayachee, 1998; Sugden &
Wilson, 2002). Similar concerns are also evident in the current debate around reform of the electricity sector
in Mexico; Serrato-Angeles (2003) notes the pressure of the international community on the Mexican
government.
Given such an environment, the aim of this paper is to highlight the opportunities that likely
privatisations nevertheless present, and thus to contribute to the literature on how economic reform might take
place. In particular, we focus on the potential for enhancing democratic participation in economic processes.
While we acknowledge that such an outcome might be equally (or perhaps better) achieved under certain
forms of public ownership, we frame our arguments specifically with reference to privatisation in order to
respond to the reality of the direct and indirect pressures faced by many governments. Our general points are
illustrated from the case of electricity reform in Mexico, currently a topical issue in local debate.
2
However, the
paper should neither be viewed as suggesting a possible path unique to Mexico, or indeed to ‘less developed’
countries more widely, nor as advocating ‘experimentation’ in the so-called less developed world. Rather, we
2
are using the Mexican case as a specific example to suggest and illustrate certain possibilities presented by
economic reform, highlighting in particular the importance for any economy of embedding democratic
principles within its development processes. As such, our analysis is broadly applicable and of relevance to all
countries, whether they be labelled ‘developed’ or ‘less developed’.
The paper is organised as follows. In Section 2 we set the context of the argument, briefly introducing
the typical rationale for privatisation and pointing towards alternative opportunities focused on the democratic
governance of economic activity. In Section 3 we elaborate the theoretical foundations of our principal
argument, synthesising existing research that suggests economic democracy is central to the successful
development of any economy, and considering the case of Mexican electricity. We explicitly position the
development of key sectors in the context of the overall development of economies. Section 4 presents the
Mexican illustration in further detail, outlining the current structure of the electricity sector and introducing a
more widely applicable model of privatisation based on principles of democratic decision-making and the
involvement of pension funds. This possibility is discussed in more practical detail in Section 5, and
concluding remarks are given in Section 6.
2. Opportunities from Economic Reform
The rationale for privatisation is typically provided in part by the external and ideological pressures
that we have already described, and in part by perceived practical and financial advantages.
Many countries have public industries that urgently need investment. It was estimated in 1999, for
example, that US$25 billion was required by the Mexican electricity sector over the following six years in order
to modernise the system and guarantee supply (Ministry of Energy, 1999).
3
Whilst this might not accurately
reflect the funds actually required, it is clear from the magnitude of the figure that there is a significant
perceived investment gap.
4
Moreover, although similar perceptions exist regarding public utility industries in
many other countries,
5
throughout the world governments’ spending abilities are seen to be severely limited.
Whilst many governments might well be able to raise additional funds on debt markets, accepted
macroeconomic ‘good practice’, backed by the influence of the Washington institutions and the agencies that
3
attach risk ratings to countries, means that governments are limited in the size of budget deficit they can run
and so spending constraints are the de facto reality. Difficult choices therefore have to be made as to how to
spend limited government resources, and priorities tend not to lie with investments in public utility industries.
For example, the World Bank has for some time emphasised the maxim that government ‘capabilities’ should
be focussed on essential tasks such as providing basic infrastructure, healthcare and education, removing
legitimacy from direct government production of goods that can alternatively be produced privately (World
Bank, 1997). Hence private investment, through encouraging private ownership, is frequently supposed as a
solution to the investment gap in what have traditionally been public industries. By removing borrowing from
government books, the financing of investment in public works is freed from ‘political considerations’; private
companies can use debt instruments to fund the investments.
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Furthermore, it is often thought that the use of markets, and therefore privatisation, has the potential
to bring operating efficiency gains. For a government, the idea that this might prove to be the case offers the
potential for longer-term reductions in subsidies for strategic services. Again using Mexico as an illustration,
that potential might be perceived to be significant; general subsidies for electricity tariffs were around US$3.1
billion in 1998 (Ministry of Energy, 1999).
Recognising these arguments, we would nonetheless propose that the reform of strategically
important sectors such as electricity is a step that should be afforded great care. While the rationale for reform
can be compelling there is a danger that, in being swept along by this tide, insufficient attention is given to key
concerns. For example, the commonly held perception that transfer to private ownership is automatically
associated with efficiency gains has been challenged in a growing literature. In a review of early evidence,
Kay & Thompson (1986, p.23) argue: ‘it does not seem that there is anything intrinsically superior about
performance under private ownership’. Similarly, Parker & Willner (2000, p.4) conclude that several studies
have reported ‘no statistically significant differences’ between the two forms of ownership, and Parker & Saal
(2001, p.62) cite a number of studies which suggest that ‘performance improvement is by no means
guaranteed and that efficiency may be related to product market competition rather than ownership per se’.
See also Branston (2000), indicating that electricity privatisation in Britain has resulted in prices that are
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significantly higher than those that would otherwise have been charged. Such findings suggest that any policy
of privatisation should be considered in the context of broader concerns, not simply changes of ownership. In
fact, much of the literature around privatisation is concerned with detailed analysis of market structure,
regulation and competition policy.
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The key argument, we suggest, is not one for or against private ownership. However, neither do we
consider regulation or competition as the main issue. Indeed, while Newbery (1997, p.357) argues that
‘regulation is inevitably inefficient’ because it cannot replicate the effects of competition, we would contend that
the limits of regulation extend significantly beyond this. According to our analysis democratic involvement in
the determination of the path of economic development is the key concern, and that is the issue which we
seek to discuss in this paper.
Our reasoning is founded on three considerations, following analysis in, for example, Cowling &
Sugden (1993, 1999), Sugden & Wilson (2002) and Branston et al. (2004). First, the impact of economic
reform, including of privatisation, is determined by changes in governance (defined in terms of strategic
choice). It crucially depends on changes in the process for making strategic decisions in the firm or sector
being reformed; more specifically on changes in who makes decisions, and/or in the basis upon which they
are made. Second, governance in the public interest has been seen to necessitate the democratic involvement
of people affected by strategic decisions in the process of making those decisions. Third, regulation of free
market economies is essentially an arms-length response to failures in arms-length relationships, whereas of
its essence democracy entails inclusive processes for influencing relationships, therefore for shaping
preferences and possibilities; in other words, mechanistic concerns such as regulation cannot ensure
democratic governance.
It is to a discussion of these considerations that we now turn, offering a more detailed treatment that
highlights the general developmental role that key sectors play in an economy. We continue to illustrate our
analysis with the case of electricity, and argue that the reform of such sectors offers considerable
opportunities.
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Most especially, their reorganisation presents a unique chance to infuse the economic
governance of key sectors with democratic principles that are inherently not mechanistic.
5
3. Theoretical Foundations
3.1. The Development of an Economy
Electricity offers an appropriate and powerful illustration of the general arguments we are seeking to
convey in this paper because it is an especially critical sector in any economy. This importance is reflected in
careful and often long running debates around the sector’s privatisation in many countries. In Mexico, for
instance, discussions about its reform are still ongoing today, several years after they were initiated.
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A reason for the importance is that provision of electricity is fundamentally linked to development
aspirations, for a country as a whole as well as for its individual communities and localities. A commonly used
development indicator, for example, is the number of households that have access to electricity, and therefore
to welfare enhancing goods such as electric lights, radios and refrigerators. There are also vital links between
the provision of reliable and appropriately priced electricity and the progress of industry, in turn the source of
employment and other benefits that are often argued to signal successful development. In the case of Mexico,
this strategic importance of electricity has been highlighted by the Ministry of Energy (1999, p.4, emphasis
added): ‘the indicators of quality and reliability of service, especially in the centre of the country, are below
those required for proper development.’
However, our argument goes beyond these typical concerns. Following Sugden & Wilson (2002), we
suggest that analysis of the actual and potential role of the electricity sector depends on the specific concept
of development that is adopted. The indicators by which development is commonly evaluated – and upon
which distinctions such as ‘developed’ and ‘less developed’ are usually based - are frequently determined
externally to an economy, strongly influenced by institutions such as the World Bank and IMF. A fundamental
problem with that approach is that such ‘development’ tends to ignore the aims of those who live in the
economy seeking to develop. This is incongruous, because the development of an economy presumably
ought to be grounded (at least in part) in the preferences of those who live within it. Indeed, a tenet of the
market system underpinning this development perspective is that others are not best placed to decide what is
appropriate for an individual or organisation; for example, government is generally not best placed to decide
what is optimal for a firm. Furthermore, external prescriptions run the danger of stifling the ideas and
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processes that stem naturally from people within a particular territory or community, and that might offer
innovative and contextual solutions to the development problems that those people face.
Accordingly, an alternative is to put aside conventional categorisations of countries as ‘developed’ or
‘less developed’, and instead to conceptualise and indeed pursue development in terms of democratically
determined objectives and processes. More specifically, in any economy all people need to have democratic
input into the decisions that determine ‘their’ economy’s development.
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This not only includes decisions
about the aims of development, but also about how those aims might be achieved. Moreover, what holds for
an economy as a whole also holds for its constituent parts; the development of a particular sector needs to be
democratically determined, and it is this democratic impetus which we suggest as the basis for sector reform.
3.2. Strategy and Governance
Another way of framing this perspective is in terms of ‘strategy’, a point that follows from the analysis
of Zeitlin (1974). He defines the ability to make strategic decisions as the ability to determine the broad
objectives of production. ‘Following Zeitlin, therefore, to choose the objectives of development is by definition
to determine the strategy of development. Thus if a given locality is to develop according to criteria presented
externally, despite that locality having different criteria, then it is subject to the strategic decisions of others’
(Sugden & Wilson, 2002, p.119).
Such comments take us to literature on the strategic decision-making approach to understanding the
theory and impact of the firm, hence to analyses of ‘governance’ and more particularly ‘democratic
governance’ (Cowling & Sugden, 1998, 1999). This approach has its origins in the seminal contribution of
Coase (1937), suggesting that ‘firm’ and ‘market’ are alternative means of co-ordinating production, and
arguing that a type of planning occurs within firms that is associated with bypassing markets. Drawing again
on Zeitlin (1974), the broad plans of corporations are the result of its strategic decisions, and to govern the
corporation is to make those decisions. Thus, if we adopt the assumption of standard economic theory that
individuals make decisions in their own best interests, understanding the impact of firms turns on identifying
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who makes strategic decisions (Branston et al., 2004). This is because, by their very nature, it is strategic
decisions that are the most important determinants of the effects of firms.
As regards the modern corporation, who makes strategic decisions is a subject of considerable
debate, although one thing is agreed: governance is exclusive, resting with a subset of those who have a
vested interest (Cowling & Sugden, 1994). This concentration of power is argued to result in the strategic
failure of large transnational corporations, therefore of economies whose development is founded upon an
especially prominent role for such firms: ‘a failure to determine the strategic direction of production and
thereby to determine the evolution of an economy, in the broader interest – in the interest of the community at
large’ (Cowling & Sugden, 1999, p.361). The advocated response
‘is to tackle the source of the failures head-on: to look for ways of appropriately
involving … people affected by strategic decisions in the process of making these
decisions, to design ways of democratising strategic decision making. Indeed, failure
to succeed in this respect will condemn an economy to be guided by the dictates of
whichever elite is formulating strategy, for example the elite currently formulating the
corporate strategies of the global giants in free market systems or, more generally,
some other group in other types of economies, perhaps the “central planners” in
Soviet-style systems’ (Cowling & Sugden, 1999, p.366).
In short, whether an economy is conventionally labelled ‘developed’ or ‘less developed’, the challenge
is to secure democratic governance, in firms, sectors, localities and the economy as a whole. The implication
is clear for the design of economic reform in key sectors, for example: such sectors must evolve so as to meet
the aims of the communities that they serve; implying the need to ensure participation in strategic decisions by
many varied interest groups and constituencies.
3.3 Interests in Electricity
That there is variation of interests regarding strategic decisions in key sectors is easy to illustrate. In
the case of Mexican electricity, for instance, we could focus on the different interests of consumers,
8
employees, environmentalists, domestic fuel producers, or other (actual and potential) suppliers to the industry
(see, for example, Galin-Hidalgo et al., 2003). Taking consumers, access is clearly an issue, as not all of the
population can currently obtain electricity. Approximately 94% of households had access in 1997, up from
87% in 1990. This apparent progress has not been equal, however, and in rural areas access remains at 87%
(INEGI, 2000). Figure 1 illustrates both the percentage of people with access to electricity in the different
states of Mexico (line) and the individual states’ share of the total electricity production (bar). The states of
Chiapas and Veracruz demonstrate clearly the current disparities. Chiapas, for example, contributes 10% of
the country's output, whilst almost 15% of its households have no access to the service. This is in stark
contrast to cities such as Distrito Federal (Mexico City), where there is virtually no production but almost
universal access.
[Figure 1 Here]
What seems certain is that potential users in Chiapas and Veracruz have a separate and distinct
interest from existing users in Distrito Federal; the latter might prefer a strategic decision to make the current
system cheap and reliable, whilst potential users might prefer that resources are employed to expand the
network so that they can gain access. Providing both groups with a democratic voice in the production
process might enable a fundamental, strategic choice to be made in a way that serves all of the people. The
alternative would be a choice based on the narrower interests of an exclusive group.
Another illustration is variation over pricing strategy. Mexican electricity has been heavily subsidised
(see earlier), and in line with much international experience it is highly likely that reform would bring further
pricing revision in terms of the level and/or structure of the tariffs charged to different groups.
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However,
separate groups would likely view revisions in distinct ways. One possibility is that some would favour pricing
strategies to limit demand, thereby restraining the need for investment in new capacity and freeing resources
for use elsewhere in the economy; perhaps they would prefer investment in education and health, sectors
which others might see as less deserving than electricity. Another possible conflict is that while industrial
consumers might favour low tariffs for high users, for example, domestic consumers might prefer discounts for
the smaller user, as might small or micro firms. Moreover, the owners of the electricity industry would no
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doubt prefer to be free to set profit maximising prices from the outset. Such aims might be misaligned with
those of the Mexican government, or with poorer communities, which might prefer pricing strategies that are
geared towards facilitating access to low-price electricity for low-income households. A reflection of such
existing variation in interests can be seen in the debate across different groups in Mexico following the
February 2002 revision to the pricing structure.
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3.4. Democratic Decision Making
Bringing these points together, at one level our argument is that where reform is required, it should
take the opportunity to embed a structure and processes that recognise and accommodate variations in
interest, and that ensure that exclusive concerns do not dominate. Mechanisms need to be found to widen
participation in decision-making, so that different interests can be articulated and the resulting decisions can
more accurately represent the concerns of a broad set of people. In short, there is a need to ensure effective
channels for what Hirschman (1970, p.30) calls voice, by which he means ‘any attempt at all to change, rather
than to escape from, an objectionable state of affairs.’ This is in stark contrast to his alternative concept of
exit; when one is dissatisfied, one withdraws from an economic relationship, perhaps starting a new one with a
different actor. One problem with relying on exit is that it is not always an option. If only one firm supplies
electricity, for example, one cannot choose to exit from that relationship and still receive electricity. Further,
voice involves an exchange of ideas, a process of deliberation and discussion that can potentially yield
consensus and/or superior outcomes to those possibilities conceived of in a framework where exit dominates.
However, voice is correspondingly much more challenging to nurture. For example, its effects cannot
be regulated into existence for a firm, sector, locality or economy as a whole. Voice mirrors democracy in that
it is inherently not mechanistic. Moreover, a consequence is that the often easier option of exit all too
frequently distorts the development of effective voice (Dewey, 1916; Hirschman, 1970; Sunstein, 2001;
Branston et al., 2004). Indeed, we emphasise that mechanisms to facilitate wider participation should be seen
as means and not ends. Their role is to facilitate wider processes of learning to engage, learning to
participate, and learning what it means to be part of democratic governance processes. It is in this sense, not
10
explicitly recognised in the majority of debates around privatisation, that we see real opportunities from
economic reform.
A second tier to our argument has wider-reaching, though admittedly less concrete, implications.
Because of their very centrality in the lives of people, we suggest that key sectors such as electricity can be
crucial in terms of facilitating and embedding principles of inclusion and participation in decision-making more
generally. In fact, if development rests on successfully incorporating the aims of people, then democracy in all
areas of economic life is central to development. Economic reform that can encourage an inclusive approach
in key sectors would allow the evolution of institutions and organisations within those sectors to be brought
more into line with the development aspirations of the people that are affected by their activities. This might
enable the beginnings of a more deep-seated change in attitudes towards engagement and co-operation that
might grow to permeate other arenas in economic life, leading to more democratic development.
Seen from another perspective, privatisation might be a requirement for access to a globalised
economy and in that sense give countries little room for manoeuvre, but its mere requirement leaves open an
opportunity to nurture democratic decision-making that would serve the development of an economy based
upon the aims of its people. How this long-run process might be set in motion raises practical issues that we
now address by considering aspects of the Mexican case in further detail.
4. Mexican Electricity
4.1. Current Structure
At the time of writing, the electricity system in Mexico is focused around two vertically integrated public
entities, the Comisión Federal de Electricidad (CFE) and Luz y Fuerza del Centro (LFC). Together, these are
responsible for transmission, distribution and supply,
13
and for the vast majority of generation.
14
In 1999 they
accounted for over 92% of domestic generating capacity (Ministry of Energy, 1999), with the remaining 8%
owned by private self-generators, co-generators and, following an amendment to the law in December 1992,
several independent power producers (IPPs).
15
However, in the absence of a market for electricity, self-
generators and co-generators only satisfy their own needs and IPP involvement is low, at 3.3% of total
11
capacity (Ministry of Energy, 1999), reflecting the unattractiveness of selling in a market where CFE is the only
buyer.
It would seem that the structure is characterised by significant inefficiencies (Ministry of Energy,
1999). The transmission grid has been argued to experience high electrical losses, with some sections having
capacity and reliability problems. These constraints impinge on efficient operation because some low cost
generating plant is unable to operate at full capacity, increasing the total cost of the system. Similarly,
distribution experiences technical losses equivalent to 10% of low voltage sales due to overloading, and
further losses caused by shortages of meters and other equipment (Ministry of Energy, 1999). In short, the
current system is vertically integrated, relatively technically inefficient, and argued to require significant
investment in generation, transmission and distribution.
4.2. Future Possibilities
Whilst some might dispute the exact scale of the existing inefficiencies and therefore the investment
required in the sector, a clear rationale for privatisation presents itself: significant new investment is required,
and efficiency within the sector needs to be improved. It can be debated whether or not it is correct to seek
privatisation as a solution, as we have suggested, but that tends to be the route towards which governments
are drawn for a variety of reasons. However, the implication of our general theoretical argument is that there
are opportunities presented by the desire for reform of some kind, and these can be seized upon to evolve
more democratic processes of decision-making. Thus, with careful design, ‘privatisation’ may be a tool for
enhancing democratic development.
A typical argument often put forward by the IMF/World Bank would be that foreign capital could solve
the investment problem; alongside and related to privatisation, reliance on foreign investment is a cornerstone
of the globalisation associated with what Stiglitz (2002, p. 221) calls ‘market fundamentalism’. In contrast, our
suggested approach is shaped by awareness of the significant dangers inherent in privatising electricity to a
small elite of international investors, whose interests are not likely to be aligned with Mexican communities.
Such a privatisation might constrain economic development, excluding or marginalising isolated communities
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where service provision is unprofitable or unduly risky, for instance. This was seen in South Africa with water
privatisation: in the town of Stutterheim, for example, a large foreign firm ‘cherry-picked’ the lucrative areas,
leaving many others unconnected (Mncwabeni & Bond, 1999). Indeed, recent proposals from the Mexican
Government (see Ministry of Energy, 2003) advocate a ‘partial’ privatisation, promoting private firms to supply
large electricity consumers. Such a scheme might be problematic; for example if large consumers are the
more profitable clients of public firms, their loss would severely restrict the choice of available strategies. This
might imply that the cross-subsidisation of marginal or unprofitable activities would be impossible, even if it
were a democratically determined objective of Mexican citizens.
As an alternative to the foreign capital solution, previous international experience in privatisation has
made much of the desire to expand ‘popular capitalism’ by broadening share ownership (Clarke & Pitelis,
1993; Reed & Anthony, 1993). However, even in the absence of wealth constraints (and therefore presuming
the widespread purchasing of shares is feasible), this is a superficial approach to extending democracy
(Cowling & Sugden, 1993). Investments in shares are just that: simple financial investments designed to
make financial returns. In Britain, for example, mechanisms to widen share ownership failed to encourage
long-term small investors, and usually only promoted speculation by foreign capital (Clarke & Pitelis, 1993).
Nothing fundamental changed; significant interest groups continued to be excluded from strategic decision-
making. Learning from this experience, we would argue that it is imperative to find alternative ways of
reducing speculation and encouraging active local participation.
One possibility might be to integrate institutional investors, such as domestic pension funds, in certain
ways. This has been suggested by various prominent figures in Mexico, including Antonio Dávila, Secretary of
the Commission for Energy in the House of Representatives.
16
It might also be consistent with the view that ‘a
major justification for developing a fully funded pension system in Mexico was that it could contribute
significantly to the development of the domestic financial system’ (Grandolini & Cerda, 1998, p. 37). Pension
funds are in essence ‘delegated monitors’ for millions of workers. If they are incorporated in a privatisation
solution, therefore, the participation of a major part of society is automatically guaranteed, most likely in a
long-term relationship. There is an inherent meeting of interests in such an approach; Mexicans owning
13
pension funds have interests both in their private savings and in the development of the economy, which we
have suggested is strongly influenced by a key sector such as electricity. They also have interests as actual
or potential consumers of electricity, and perhaps as workers in the sector. As it currently stands, however, it
seems that the pension funds have a simple duty to consider the risk and return of their investments
(Grandolini & Cerda, 1998). Hence their integration into a democratic approach to development based upon
wider concerns would likely require reforms, an issue to which we return in the following Section.
Notwithstanding the need for reforms, it is nevertheless noteworthy that pension funds have already
been involved in privatisations in other Latin American countries; in Chile, for example, pension fund
investments have accounted for approximately 75% of total equity holdings in privatised companies (Davis,
1995; Vittas, 1996). More recently, such schemes have been undertaken in Eastern Europe, although the
outcomes there have been mixed (Pistor & Spicer, 1997).
The potential for using pension funds in Mexico is clearly significant. In the mid 1990s, the Mexican
government undertook a reform of pensions. The traditional ‘pay-as-you-go’ system was replaced by a fully
funded scheme, moving from ‘defined-benefits’ towards ‘defined-contributions’.
17
This reform created a group
of new institutional investors. In the near future, they are likely to become the largest institutional investors in
Mexico; at the end of 2000 their value stood at around US$10.4 billion (CONSAR, 2001), and considerable
growth is expected in coming years. As such they have a key role in expanding asset holdings within Mexican
society, but also enormous potential in the promotion of development, using pension savings to finance
domestic economic activities.
Following the reforms, the pension funds began with a very restrictive investment regime, which
helped them to bypass the Mexican crisis in the mid-1990s. Amongst the 17 active funds, only approximately
3% of their portfolios are invested in shares, the remainder being held in government debt instruments and
high-rated private debt (CONSAR, 2001). However, government debt has been declining in the last 10 years,
while the funds are continuously growing, and thus there are significant pressures to relax the present regime.
The reality is that the funds may grow faster than the available investment opportunities in relatively safe non-
equity assets.
14
Some solutions to this dilemma point towards a liberalisation that includes allowing overseas
investments (Srinivas & Yermo, 2000; Mitchell, 1999; Vittas, 1996).
18
Other Latin American countries, such as
Chile, Argentina and Peru, already allow investment in foreign securities. Although Chile sets a maximum
limit, this is as high as 20% of the total portfolio (Srinivas & Yermo, 2000). The potential problem is that
outward foreign investment is an export of domestic capital; it constitutes resources that could otherwise be
used to nurture development of the local economy.
Participation by pension funds in the reform of the electricity sector could be attractive, although it
might seem that there exists a trade-off between maintaining the security of the funds and investing long-term
in potentially higher-risk Mexican firms. Recent electricity reform experiences in locations such as California
and Brazil, and the fact that most electricity reforms include the introduction of some form of competition
(which by definition implies some risk), lend weight to the view that participating in Mexican electricity
privatisation would be a risky endeavour. However, the Ministry of Energy (1999, p. 62) has documented that
‘electricity companies are considered to have low risk in a growing industry’, and therefore have suggested
that ‘pension funds will be able to participate in ownership of these companies, either as direct shareholders or
through financial markets.’
19
Indeed, whilst recent international experience shows that electricity reform can
be a troubled experience, and thus suggests a degree of caution, there has been much written about the
reasons for the difficulties encountered in the various markets. For example, the likes of Joskow (2001),
Borenstein (2002), Sioshansi (2002), Green (2003), the Economist (2003), Zilber (2003) and de Araújo (2001)
highlight specific structural and regulatory problems as being amongst the key causes of the difficulties
encountered in the growing markets of both California and Brazil. Given such individual considerations, and so
long as due care is given to the reasons why previous reforms have succeeded/failed elsewhere, there is no
reason to assume that similar mistakes would be replicated or experienced in reform on other occasions.
Furthermore, the size of the Mexican pension funds is such that the amount of investment they would
be able to make in the domestic electricity sector is limited in relation to the total amount of investment that
might be required. Therefore, their investments could (initially) be confined to the least risky parts of the
electricity sector so as to protect the integrity of the funds. In this way, it could be argued that pension fund
15
participation in the high-growth electricity sector privatisation is less risky than investing in many other
potential equity investments in Mexico, or indeed in currently volatile international securities, which not only
run the risk of a direct capital loss but also raise the possibility of exchange rate risk.
20
In the next Section we discuss in more practical detail how the involvement of pension funds might be
incorporated into the reform of the electricity sector, using this as an illustration of how the opportunities
presented by reform might be more generally used to infuse economies with greater degrees of economic
democracy. Indeed, we argue that the incorporation of pension funds in itself is insufficient. Firstly, because
democratic engagement in the economy implies the opportunity for all interested parties to participate in key
economic decisions. Following through the Mexican example, we therefore propose a balanced ownership
and control structure comprising three key elements; pension funds, other investors and, crucially, all Mexican
citizens. Secondly, within any configuration of control there would also be a need for democracy in separate
organisations and institutions. In general, the latter is not our specific focus in this paper, not least because it
has been discussed extensively elsewhere; on corporations, for example, see Knight & Sugden (1990),
Branston et al. (2004) and references therein.
5. Reform with Democracy: Some Practical Considerations
5.1. General Structure
In the late 1990s, The Ministry of Energy (1999) advocated a new structure resembling that of the
industry in England and Wales when it was privatised in 1990. There are currently constitutional barriers to
introducing such changes, but they do offer an analytical starting point for the more fundamental issues we
seek to raise in this paper.
21
The Ministry envisaged generation being separated into multiple companies to
encourage competition and hence economic efficiency. Electricity produced by these companies would then
be sold via a co-ordinated market mechanism and transmitted by a national grid, owned by a single company.
Finally, a number of regional companies would be responsible for distribution and supply. The proposal also
allowed for a new body overseeing system operation and dispatch on a day-to-day basis, and provision was
made separately to strengthen regulation, currently undertaken by the Comisión Reguladora de Energía. It
16
follows from our analysis that it would be important that such bodies be subject to democratic control
themselves, providing channels for widespread engagement in their planning and strategy.
5.2. Pension Funds
Within such a general structure pension funds would offer a way of raising private investment capital
while still permitting the possibility of a degree of citizen-based control. They could therefore be given
preferential treatment, for example in terms of first refusal on any shares sold (both now and in the future), so
as to maximise their involvement. Although the current size of the funds means that their participation would
initially be limited, as low risk and expanding institutions they could raise funds for investment by borrowing at
preferential rates using as collateral the value of future contributions.
If pension funds are unable or unwilling to invest directly in a privatised electricity sector, perhaps
because they see ordinary shares as being too risky, innovative financial solutions could be found to
encourage their maximum participation. For example, one option might be for preference shares. Another
might be for the Mexican government to underwrite or issue a new form of ring-fenced debt instrument linked
with investments in certain electricity companies (drawing on experiences from Network Rail in Britain, for
example
22
). These could present a lower risk than the pension funds simply owning company shares outright,
but if set-up correctly, would still link in a long-term way the pension fund investors and the electricity sector,
whilst also removing some responsibility for the sector from the government. Such an approach would also fit
neatly with the current investment regime of the funds, which eschews shares for the most part. However, for
the sake of simplicity, in the rest of the paper we will assume that such a scheme is not needed and the funds
invest directly in the electricity sector via the purchase of ordinary shares.
One possible problem of encouraging large-scale pension fund involvement is that the fund managers
might decide that a better rate of return or risk/return balance could be made in investments elsewhere, and
would thus seek to sell some or all of their holdings in the various electricity companies. We would therefore
advocate that in exchange for the pension funds receiving preferential treatment (e.g. the right of first refusal,
discounts on privatisation price) that there be a covenant placed on the shares that prevents their sale unless
17
the yield on the shares (either capital gain or dividend) falls below a certain level, to be set externally.
Alternatively, there could be limits on the period of time that shares have to be held and/or the amount of
shares that can be sold in any given period. Such approaches would balance the need to ensure that shares
were not sold quickly, resulting in the industry rapidly falling into the hands of a small elite of international
investors (as happened in the UK), whilst also limiting the pension funds’ exposure to a specific industry
should something unforeseen happen.
Pension funds would be in a position to create many options for participation in the strategy-making
of the firms in which they invest. Specifically, as owners they could supervise and influence management.
Indeed, they would imply a concentration of ownership, which Stiglitz (1985) argues is an effective method for
reducing agency problems. Moreover, they would have incentives to produce and analyse information for
monitoring; the size of their investments would permit dedicated resources to this end.
In realising this element of control, pension funds can be seen as having two distinct duties. The first
would be to balance risk and return for their contributors. In this sense they would be simply ‘delegated
investors’, searching for an attractive rate of return. However, the second would also be ‘delegated monitors’
for workers’ interests that go beyond the financial status of their pension. Since those contributing to the funds
are citizens of Mexico they have interests in the economic development of their communities, and as
consumers of electricity they are also likely to be concerned with issues such as price and quality of service.
Contributors to pension funds therefore face inter-temporal, and often conflicting, concerns. Fund managers
could have a duty to balance these concerns in a process of mediation, in order to elicit compromise and
agreement. Indeed, from the perspective of government, this balance is also crucial. While pension fund
returns are important to negate the need for pensioner assistance in the future, government also has a strong
interest in overall economic development.
Correspondingly, this presents two principal challenges. Firstly, pension fund managers would be
required to participate intensively in the strategic decisions of electricity firms, in order to look after the
investments and to transmit the desires of the people that they represent. Secondly, it would be necessary to
create an adequate way of transmitting contributors’ aims to pension fund managers.
18
The direct involvement of pension funds and other institutional investors in the decision-making of
firms is a widely discussed phenomenon. It is addressed in a large body of existing literature; see, for
example, Rubach (1999) and Faccio & Lasfer (2000) on general matters, and Vittas (1996) on the case of
Chile. The participation of Chilean pension funds in privatised firms during the 1980s helped them to create
the infrastructure and knowledge to participate in share ownership. In fact, fund managers in Chile are now
able to vote for independent directors. The challenge in Mexico, therefore, is to improve the role of fund
managers in corporate decision-making along similar lines. This would involve cultural changes and a
learning process, which might be stimulated by the chance to become involved in the electricity privatisation,
and nurtured by the pension fund regulatory authority.
However, what is not clear from existing work or experience is how the challenge of transmitting the
different, and often conflicting, interests of pension fund contributors can be met. To give a flavour of what
might be possible, we suggest a number of options. Ballots and elections of fund managers could be
instituted, allowing contributors to express their opinions on how funds should be managed, a concept not
dissimilar from the way in which an electorate might determine the path of a country, or (in principle) senior
management might be accountable to the members of a corporation (Farrar & Harrigan, 1998; Mayson et al,
1999). In exceptional circumstances referenda might be called, perhaps if a certain number of contributors
can be gathered to support a particular proposition. More generally the pension funds might be invested with
a duty actively to consult with and seek the opinions of its members. This might take the form of local
meetings with participants, or greater opportunities for feedback regarding key decisions. It may also be
possible for a pension fund to evolve a particular niche in terms of issues with which it is especially concerned.
Individuals would then be able to self-select the fund that best represents their interests. Given their
pioneering nature, all of these mechanisms would need to be considered and refined over time, in the light of
success or failure. In this sense it is important to see them as a means of stimulating the longer-term
evolution of a deliberative and participative economy, rather than as an end in themselves.
In this regard, there are undoubtedly limits on what is feasible at first. Special concern might be
expressed, for example, at the cost of the monitoring and consultation that would be required. This is
19
something that must clearly be considered, but what would matter is that there exist a number of ways in
which contributors can have their opinions debated and voiced. Multiple avenues are important; even if a
particular method were unavailable to a certain group, there would be alternatives. In this way, pension fund
contributors would have the opportunity to become involved in decisions where they feel that they have an
interest, but the choice to remain passive at other times. This would be in line with Hirschman (1970, p. 32); ‘a
mixture of alert and inert citizens, or even an alternation of involvement and withdrawal, may actually serve
democracy better than either total, permanent activism or total apathy.’
5.3. Citizens
We recognise that other actors, perhaps including domestic companies, transnational corporations
and/or government, would be required to play a significant role in the sector. Pension fund participation alone
would not be sufficient in the Mexican case, certainly in terms of the amount of finance thought to be required,
and also possibly in terms of operational support and industry expertise. Moreover, given concern with the
undemocratic nature of strategic decision-making, the rights of both groups of investors (pension funds and
‘others’) would need to be balanced further against the interests of the people of Mexico.
Although pension funds provide a great many Mexicans with a potential for voice in key decisions,
they are by no means wholly inclusive institutions. Indeed, CONSAR (the pension funds supervisory authority)
estimated in December 2000 that there were 17.8 million workers registered with the funds, representing only
47% of the Mexican labour force. There is a danger, therefore, that the decision-making structures would tend
to exclude a large segment of the population. Crucially, those Mexicans not linked to the pension system, and
therefore excluded from decision-making, would be likely to correspond to the poorer, rural groups in society,
and the majority of those currently without access to electricity. In order to balance this tendency, a third
control group could be formulated. This might involve all citizens in Mexico – both those with a direct interest
in the sector (such as workers or consumers) and/or those with a less direct interest (such as potential future
consumers). Specifically, it could take the form of an in-built right, realised at birth and relinquished upon
death, for all citizens to have some level of participation in decision-making within the sector. It is unlikely that
20
this participation could be in the form of a financial stake, given the wealth constraint facing many citizens, but
there is no reason why this should be necessary for effective participation.
Various mechanisms and processes would be necessary to facilitate incorporation of wider interests,
many of which would share a fundamental symmetry with the measures we have already outlined when
discussing the governance of pension funds. One option would be the creation of a body that could help form
sets of like-minded individuals; it could facilitate the formation of interest groups. These could be more
conventional consumer pressure groups lobbying over specific issues, trade unions representing workers in
the industry, or groups that are rooted in the interests of a specific locality. We see the latter as fundamental,
since it is the local level where broader economic development aims are affected by such factors as electricity
access and pricing. In particular, we see localities forming more general forums for thinking about, analysing
and discussing issues of importance to their development, some of which may involve electricity. From this, a
layered process could be created, whereby different localities could come together to express and debate their
concerns, then to make representations to the electricity companies. In this way, decisions concerning
electricity could be integrated with concerns around the more general development of localities.
An industry structure along these lines would enable the level of participation (and/or the balance of
ownership) to vary across different parts of the industry. It might thus reflect the importance given to particular
decisions in each part. For example, in generation one of the key imperatives is low cost. Given a sufficiently
large number of companies to ensure competition, and given democratic channels through which workers
could suitably influence strategy, it might be appropriate for each company to be owned by a particular group,
perhaps a pension fund or a foreign investor. A safeguard to the system might then be provided by wider
interests having the power to act where particular and uncommon issues and tensions arise; these might be
decisions over the location and type of power plant, for example. In contrast, more balanced ownership might
be required in transmission or distribution, where natural monopoly considerations constrain the feasible
degree of competition, and where decisions affecting issues such as pricing, access and reliability impact
heavily on different localities and interested groups within them. The exact balance is something that would
need to be adjusted and refined, again reflecting the notion of a learning process that is not confined to the
21
electricity sector, and that has the potential to impact more fundamentally on decision-making in different
areas of economy and society.
A criticism of this type of system might be that private investors could be deterred by the possibility of
being held ‘hostage’ by the voice of the community. However, practice shows that this need not be the case.
In Britain, many privatisation experiences incorporated the idea of a ‘golden share’ for many years. These
were special shares held by the government, to enable it to exert a disproportionate degree of control over
major corporate events, such as at times of potential foreign take-over or merger (see Thomas, 1996 and
Jones et al, 1999 for further detail on golden shares). As another example, German companies are legally
bound to have a second board containing worker representatives. These examples are from systems that
have functioned and, to some extent, thrived in practice. They indicate that the idea of widespread voice in the
Mexican electricity industry is not so far from established practice as to be unworkable.
5.4. Balanced Governance
In line with our discussion, a suggested governance structure for the privatised electricity sector is
illustrated in Figure 2. The top half of the Figure shows the sector split into its three core elements –
generation, transmission and distribution - while the bottom half represents localities within Mexico. For the
purposes of illustration, we have depicted two such localities, one urban and one rural, with different
characteristics in terms of access to electricity and pension fund contributions. Represented in solid arrows
are electricity flows: from the generators to the local distribution companies, via the transmission company,
and finally to the localities themselves. Around this we have illustrated our proposed flow of decision-making
input and control (dashed lines), incorporating the three distinct groups: pension funds; other investors; and
Mexican citizens. Other investors have direct input into the three different types of company through
ownership. Pension funds also have direct influence through ownership, but their input is also linked explicitly
to the localities through the subset of each locality that contribute to the funds. Finally, Mexican citizens differ
from the other groups in that there is no element of financial ownership. Their input is thus shown on the
opposite side of the Figure. It is represented through local fora (which may be informal or formal), where the
22
development aims and problems of localities can be aired among local actors. Where these aims are
influenced by electricity companies, it is envisaged that representations could be made either directly or
through a broader layer where distinct localities co-ordinate their concerns.
[Figure 2 Here]
The precise form of the channels for representation is an important consideration. In particular, there
is a danger that the non-financial status of citizens would imply, in practice, a comparative lack of voice. It
might be necessary, for example, to formalise this participation on the board of the company, perhaps through
elected representatives. In this way, the channel might become more effective, but it would only be utilised
where there is a divergence of interests. This solution would be especially appropriate for local distribution
companies, which play a more prominent role in specific localities, notably in terms of widening access and
expanding the system. This is not to deny, however, that there might (or should) be other channels through
which localities can express and exert their voice. Indeed, one of these could be through the regulatory/co-
ordination body, which is also included on the left side of the Figure. Individuals or localities could input into
this body, either directly or through the multi-locality forums, and thus influence how this body interacts with,
and guides, the electricity sector as a whole.
6. Conclusion
This paper has considered a fundamental issue for many countries, be they so-called developed or
less developed: the possibilities surrounding privatisation. Its particular focus is that reform might enable voice
to be given to all of those with an interest in production activity. This is considered to be attainable without
necessarily jeopardising the investment that might be essential for increased efficiency. How this could be
achieved in practice is addressed using the topical illustration of reform of the electricity sector in Mexico.
Specifically, what is explored is a privatisation model which has an ownership and control structure
that balances the interests of investors and citizens. It is envisaged that pension funds could be important,
linking investment back to the individuals and groups with interests wider than those traditionally associated
with investors. While involvement of the funds would move towards the guiding principle of democratic
23
control, it would fall short of being fully inclusive. We have therefore also contemplated a more direct
incorporation of citizens, through a formal right to participate in strategic decision-making. Finally, we have
identified various governance mechanisms that, with further refinement and positioning in the context of
particular cases, might allow effective participation to be realised. By focussing on key sectors, where all in
an economy have a strategic interest, we have highlighted a potential to embed principles of democratic
engagement which could uncover a new approach to the governance of development in an economy as a
whole.
There can be a tendency when discussing markets and market systems to assume that their forms
are given and inflexible. Because privatisation is often seen as a prerequisite for a market economy, it is
frequently held that privatisation must imply a fixed outcome. That view is wrong. Privatisation might be a
requirement for developing countries if they are to have access to a globalised economy. To that extent,
countries have little room for manoeuvre. However, a mere requirement leaves open an opportunity.
Privatisation can be achieved in numerous formats. It might be possible to create a democratic decision-
making structure, one that would serve the development of an economy based upon the aims of its people.
We suggest that those people would benefit from meeting that challenge.
ix
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Notes
1
For an overview of privatisation processes in the UK and a discussion of their wider impact, see Clarke (1993), Martin & Parker
(1997) and Florio (2004).
2
See, for example: Islas & Jerónimo (2000); Castañeda-Sabido and Lopez-Calva (2001); Islas-Samperio (2001); Calderón-Hinojosa
(2003); ‘Propone Senador Revisar Esquema de Subsidios a Tarifas Eléctricas’, El Economista, 15th October 2001; ‘La Apetura del
Sector Eléctrico, una Trampa: Ortega’, La Jornada, 20th August 2001; and ‘México Sufrirá un Desastre si Privatiza su Sector
Eléctrico’, La Jornada, 22nd November 2003.
3
Similar concerns are reflected in ‘México Dependerá más del Capital Privado por la Limitación del Presupuesto’, La Jornada, 14th
May 2001. See also Galina-Hidalgo et al. (2003).
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4
In evaluating such figures we would not rule out the possibility that an optimal solution may be to actively manage demand, thus
reducing the requirement for investment. As should become clear from our argument as it progresses, the determination of what is
optimal in this sense ultimately relies on democratic participation in the process of making such strategic decisions.
5
For example, in Brazil it is estimated that US$6.8 billion a year of new investment is required to avoid electricity shortages, and that
the transport infrastructure requires US$5.1 billion of investment to maintain annual economic growth of 3-4% (see Economist, 2004,
p.53). Similarly, in the UK it has recently been suggested that the electricity sector requires £50-70 billion of investment over the
coming decade (see ‘Power Prices must Rise to Avert Blackouts’, The Independent, 11th May 2004), while the perceived investment
gap in transport is reflected in planned spending of more than £22 billion in the period to 2009 by Network Rail, the national railway
infrastructure company (Network Rail Ltd, 2004).
6
This is true in both ‘less developed’ and ‘developed’ countries. For example, witness the debate about ‘Private Finance Initiatives’
(PFI) as a way of raising investment capital in the UK for health, education, rail networks, etc.. See The Observer, 6th October 2002
and The Independent, 7th October 2002.
7
See, for example, Vickers & Yarrow (1988), Armstrong et al. (1994) and the volumes edited by Bishop et al. (1994) and Parker &
Saal (2003).
8
This echoes the view in Cowling & Sugden (1993, p.56) that British experience of privatisation is a ‘catalogue of missed
opportunities.’
9
See ‘Buscan Revivir la Reforma Eléctrica’, El Economista, 13th May 2004, commenting on the recent revival of reform plans.
10
This is not to preclude co-operation with external sources: see Sugden & Wilson (2002) for more detail.
11
See Clarke (1993) on Britain and Rivera (1996) on pricing revisions following privatisations in the water industry.
12
For more detail on these pricing revisions, see Diario de la Federación, 7th February 2002
(http://www.gobernacion.gob.mx/dof/2002/febrero/dof_07-02-2002.pdf), accessed on 26th July 2004.
13
Transmission refers to the use of the high voltage national electricity grid, distribution refers to the low voltage local electricity
lines, and supply refers to the sale of electricity to the final consumer.
14
CFE covers the entire national territory with the exception of Distrito Federal and parts of the states of Morelos, Hidalgo and
Puebla (i.e. the central area), where LFC has responsibility.
15
Co-generation refers to electricity that is generated simultaneously with steam or other types of thermal energy used in an
industrial process, or generation from the waste heat of an industrial process. Self-generation refers to the generation of energy to
meet a producer’s own physical or contractual needs (Ministry of Energy, 1999).
16
See ‘Propone diputado usar recursos de Afores en electricidad’, El Economista, 16th October 2001. Recently it has been
suggested that private investors could use the resources of the pension funds as a source of finance for electricity projects ; see
‘Indispensables, los cambios constitucionales en energia’, El Financiero, 28th May 2002.
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17
There are large social and fiscal implications from this reform that are beyond the scope of this analysis. For detailed background
on and discussion of the Mexican pension reforms, see Sales-Sarrapy et al. (1998) and Grandolini & Cerda (1998). For critical
discussion around the evolution and implications of Latin American pension reforms more generally, see Barrientos (1998), Müller
(2000) and Charlton & McKinnon (2000).
18
The arguments of these authors are based mainly on diversification gains and the lack of safe investment opportunities in
developing countries.
19
Many experts (see Toporowsky, 2002) recognise that when institutional investors own large portions of a firm’s stock, its value will
be highly dependent on the future purchases (or sales) of the pension funds, increasing price volatility and risk. This might be the
case for mature pension funds, where the demand for shares might be declining, but is likely to be less pronounced for the young
Mexican pension system for at least the next 50 years.
20
An alternative strategy is for the government to issue new debt to finance the necessary investments in the sector (the previously
mentioned difficulties with such a strategy notwithstanding), but this would leave pension funds locked in low-profit assets because
public debt has a low return. Instead a direct investment in the electricity sector might give pension funds a more desirable risk-
return combination, given that the returns in the electricity sector are likely to be higher than in Mexican government debt
instruments.
21
Whilst the exact industry structure of the privatisation is not the focus of this paper, we would caution against the introduction of an
overly fragmented sector as this has proved to be problematic elsewhere, and increases the risk of all those involved with the sector.
22
Network Rail has billions of pounds in debt that is ultimately underwritten by the British Government, but which does not appear as
part of official government debt. See ‘Network Rail Pays Directors Bonuses Despite £758m Loss’, Financial Times, 3rd June 2004.
