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Telmex

Anyone can become a millionaire overnight out of sheer luck. But to reach the top of the list of the world’s billionaires takes half a lifetime of effort and, according to modern Western mythology, requires the profile of a generous, creative and audacious man. Bill Gates is seen as an IT genius, Warren Buffett as an infallible investor, George Soros as a rebellious and chic millionaire. Carlos Slim is known for being one of the richest men in the world in a country with 50 million poor. Perhaps this is why, rather than believing in the value of his work, his critics compare him to the Russian oligarchs, who multiply their fortunes through corruption and receive business advantages under the shadow of power. The Wall Street Journal attributes Slim’s fortune to his monopolistic practices. The magnate has denied this time and again, although in Mexico there is a very popular notion that without the help he received from the government he would never have reached the heights of the world’s richest.

During the May 1 Workers’ Day Parade, 1989—when the PRI regime still went to great lengths to create the display of thousands of workers parading down cities’ main streets—then-president Carlos Salinas de Gortari, watching the event from the Palacio Nacional balcony, asked the director of the state-owned company Teléfonos de México (Telmex) to stop marching and come up to the balcony to watch the workers’ contingents together. A simple gesture like this, for the PRI, held the key to the future: the government was preparing to privatize the company. A year and a half later, on December 11, 1990, Slim was presented as the winner.

If social media such as Twitter and Facebook had existed back then, Carlos and Charlie’s would have become a trending topic—the popular joke alluded to the never-proven fact that Carlos Slim was in reality a front man for Carlos Salinas de Gortari in the purchase of the national telephone company. The first exhaustive journalistic criticism of the irregularities was Operación Telmex (Operation Telmex), by Rafael Rodríguez Castañeda, current director of Proceso, a weekly political analysis magazine. In his book, the journalist predicts the creation of a telephone monopoly with limitless gains. He also quotes a Business Week article, published in July 1991, that states:

rumors and allegations of nepotism surround the entire privatization process. In response, the government did the impossible to create an image of impartiality. For example, in the cabinet meeting that would decide the new owners of Telmex, the three bidders were named A, B, and C. But everyone knew who was who. “We’re not selling oranges here,” said a secretary of state.

According to this theory, there were political motivations behind the conditions for advantageous monopoly: the government needed to demonstrate that selling state-owned companies was profitable, and sought to consolidate and maximize Telmex in order to show it off as a success story, instead of creating free-market competition. According to this theory, Slim’s success as a businessman was supposed to signify the success of the PRI regime’s privatization policy.

A 1990 document entitled “Regulatory aspects of the privatization of Telmex” outlines the evolution of the regulations around the sector throughout the twentieth century in Mexico:

1938 General Communication Law

• Telephony franchisees were foreign

• Existence of two telephone companies, two public networks

1948–68 Stability and development

• Telmex is created by merging the two existing companies

• Annual growth rates of 10 to 14 percent

1968–81 Political crisis—Major intervention from the State

• Establishment of a new franchise (1976)

• Nationalization of telecommunications (establishment of the regulator-operator duality)

• Deterioration of tariffs, political and labor relations

• Growing tax burden

1982 Start of restructuring of the economy

• Start of process of change to establish a modern regime

• Correction of public finances

• Opening of the economy

• Democratic reform

1988 Change and opening

• Breaking of the duality regulator–operator

• Deregulation

• Privatization processes

Independent specialists in telecommunications say that a significant amount of the privatizations that took place during the 1990s in Latin American and in the former Soviet republics occurred in a very similar fashion. When companies ceased to be a state monopoly, two or at most three new major shareholders would enter, fusing an experienced operator with a huge financial backer in order to administer the existing telephone networks, because creating new infrastructure was not economically viable. An even more radical, often cited theory regarding monopolies in telecommunications is that they were “natural” because of the large-scale investment required in order to maintain a certain efficiency. However, it’s worth noting that with the networks already in place, as is the case now, it is possible to maintain efficiency and generate greater competition.

During Salinas de Gortari’s term of office, nearly 1,000 public companies were privatized—Telmex, the only telephone company in the market, was the most profitable, and the most controversial. Until then, Slim was known only as another businessman supporting Salinas de Gortari from the start of his election campaign. He was under fifty years old and the only thing widely known of his biography was that he had started out working as broker in the stock exchange and had made his fortune by buying companies in crisis and turning them around almost miraculously, inspired by the so-called Modigliani-Miller theorem, which encourages buying and operating companies even if they are financed by the sale of debt.

The purchase of Telmex included favorable clauses that gave the businessman control over the company, and the monopoly of its service, during the period that saw the greatest number of new landline purchases in the country. Buying Telmex in 1991 catapulted Slim as a public figure in Mexico, and perhaps contributed towards the normalization of evil that Nobel Prize-winning author Octavio Paz attributes to the PRI in his essay El ogro filantrópico (The Philanthropic Ogre).

The transition from a nationalistic to a free-market economy in Mexico can be compared to what Russia experienced during Perestroika. In the midst of these changes, both countries saw for the first time the emergence of multimillionaires who took center stage in the political and social life of the nation. Many of these wealthy men protagonized a type of capitalism where influence peddling occupied the void left behind by a lack of strong laws and government. For this reason, when under international scrutiny, the Mexican multimillionaires of the twenty-first century are seen as more akin to the Russian oligarchs than to Buffet, Soros or Gates, even though the conduct of the latter three has also been questioned, like when Soros launched a speculative attack against the pound sterling in 1992, known as Black Wednesday, causing severe damage to the British government. It is no secret that Gates has also consolidated a monopoly with Microsoft: nine out of ten computers in the world are manufactured by his company. The difference is, he went on trial in the United States for his monopolistic practices and, over time, became the greatest philanthropist that has ever existed, giving away more money annually than the entire budget of, for example, the World Health Organization.

Analyst Gerardo Esquivel created a report for Oxfam and the organization Iguales, entitled Desigualdad extrema en México: concentración del poder económico y político (Extreme inequality in Mexico: concentration of economic and political power), which was published in 2015. In it, he cites an Organisation for Economic Co-operation and Development (OECD) study, which concludes that between 2005 and 2009, thanks to Slim’s telecom monopoly, Mexicans were $129 billion worse off (an amount equivalent to 1.8 percent of the country’s yearly GDP), a fact attributable to the lack of competition and high concentration of the market within an openly dysfunctional legal system. “Evidently, the weakness of Mexican institutions,” writes Esquivel, “has contributed to the sharp increase in the country’s widespread inequality. The entire Mexican population paid extortionate telephone rates due to the monopolistic power of Mr. Slim’s companies.”

When Slim submitted his tender for Telmex, he didn’t even make the Forbes list he now tops. The story is often told by his admirers that when he received the state-owned company he was a well-established businessman who possessed an admirable downto-earth quality in his style of working with people. His defenders also recognize that Slim had a close relationship with Salinas de Gortari since his times as secretary of programming and budget, and the tycoon has never tried to hide the fact that he is a PRI sympathizer.

My interviewees often described Slim as a businessman who was sharp, nationalist, austere and a loyal PRI supporter who, a year after purchasing Telmex, achieved a net worth of over $1 billion, with which he entered, for the first time, into the exclusive club of those on the Forbes list.

Since he appeared on the global scene, one of his main critics has been the Wall Street Journal, though they have their own agenda in their editorial questions, according to some specialized journalists, such as Diego Fonseca: “WSJ tends to speak for Corporate America, which has been wanting to get its hands on Telmex for a while.” The author of Joséph Stiglitz detiene el tiempo (Joséph Stiglitz stops time), a narrative profile of the economist, explains that now the bulk of the value of Slim’s telecommunications businesses is increasingly international, particularly when it comes to mobile telephony, Internet and data, with a more promising future than fixed landlines, and that telecom monopolies are almost “naturally occurring” in deregulated economies due to the scale of business (the high cost of investing in landlines in the past and, more recently, the arrival of mobile telephony).

Fonseca explains:

At least in the twenty greatest world markets there is one “incumbent” (a company with vast shares as compared to the rest, as it was the buyer of a privatized asset) during the opening. These incumbents have handled at least 60 percent of each market. Many of them are private and many others are partly state-owned. (An example: Telefónica, which has thrown bombs at Slim for his “monopoly,” has historically been dominant in Spain, and is a company of mixed public-private capital.) As the infrastructure becomes optimal and the markets increase their client numbers, the weight of the incumbents is reduced. That makes the Mexican phenomenon more complicated, because after almost twenty-five years, recently with the start of 2014, Slim would reduce his enormous share from 70 percent to 49 percent, a share which is nearer to what telephone companies possess in the main European markets, for example.

Since Slim reached the top of the ultrarich, he insists, when speaking at conferences in the United States, that he does not run a telecom monopoly because in Latin America, for example, he is competing against Telefónica de España, and has competed at different times against Vodafone, Verizon, AT&T and MCI World Com. In fact, he often goes even further to suggest that there are no monopolies anywhere in the world: “It’s just that there are some companies that are bigger than others,” he says.

Telmex represented “very difficult professional and financial challenges,” Slim explains in his document “History of Grupo Carso.” At the time of purchase, the telephone company was operating “with huge deficiencies in service, obsolete equipment, a deteriorated exterior plant, a huge demand that was not being met, and combined subsidies of painful adjustment. All this was having huge consequences on the social and economic life of the country.” Then he revealed that his investment was financed through unsecured debt for $500 billion: “The first public private offer for $307 billion, an increase in capital of $500 billion, and another public international offer for $1.094 trillion in January 1993.”

The businessman says that consolidating the Mexican controlling company “was a difficult task due to the investment amounts and terms (five to ten years), and negotiations with our technological partners. Southwestern Bell and France Telecom were particularly complex, although we have not had any problems since the agreements were finalized. No doubt, the more you discuss and define the conditions of a partnership, the less problems you encounter further down the line.”

For Jacques Rogozinski, who led the privatizations during the government of Salinas de Gortari, what happened with Telmex and other state-owned companies was a normal process considering the context:

In Mexico, the potential buyers who had access to the kind of resources required to purchase and operate Telmex and other state-owned companies and banks constituted a very small group of businessmen: the income distribution, the lack of savings, and the absence of loans for local businesspeople by the national and international banks, among other factors, did not allow (and still do not allow) for the development of a broader network of large businesses. On the other hand, whether there is a greater or smaller number of stakeholders does not depend on Mexico: all over the world, purchasing large companies is something that can only be done by a handful of large-scale corporate groups with extensive knowledge of the sector and a group of financial partners with sufficient capability to provide the capital in the long term. In Mexico, that market is still very small.

If anyone wanted to participate in the processes of purchase and sales of state-owned companies, they had to have a huge financial backing and belong to the country’s corporate elite. Therefore, they also needed to have political connections with those in power, including at the presidential level. This happens in all countries. It would be absurd that if Bill Gates or Mark Zuckerberg call the president of the United States, he refused to take their call. And it is equally naïve to suppose that, in private conversation, the president of a nation would not pay attention to the needs of the most important businessmen in his or her country.