Lessons from bank privatization in Mexico

___P54OZ7 Policy Research WORKING tAPERS L Financial Policy and Systems Country Economics Department The World Bank November 1992 WPS 1027 Lessons from Bank Privatization in Mexico Guillermo Barnes Bank privatization in Mexico - arguably one of the most successful financial operations in recent years - has been facilitated by a strong macroeconomic stabilization program, legal and financial reform, and the adoption of clear objectives, precise rules, and transparent procedures. Policy ReaxchWo*&ingPapcrs disscrninatethe findings of work in progrm and encouumn theexchange of ideas among Bank staff and all othes intced in developnentissue& an epaped , distributed by theResearch Advisoxy Saff, carry thenames ofthe authors,reflect onlyoteirviewsband shouldbeused and ited acBordingly. The findings.t iana petations,and concbons am the authors'own.Theyshould not be sutnbute to the World Bank, its Board of Diretos, its management. or any of its member countries.  Policy Research Fin"anca Polic and Sste1ms WPS 1027 This paper- a product of the Financial Policy and Systems Division, Country Economics Department- is part of a larger effort in the department to study issues in bank privatization. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Wilai Pitayatonakam, room N9-003, extension 37664 (November 1992, 22 pages). The recently completed privatization of Mexican * Legal reforn should lead to structures that commercial banks may be one of the most encourage solid, efficient financial intermedia- successful financial operations in recent years. In tion. 13 months, the Mexican authorities were able to sell 18 banks to private groups of Mexican * To encourage ample participation and to investors for more than US$13 billion total- ensure fairness, the privatization process must be more than three times book value, and with a trustworthy - with clear objectives, precise price/earnings ratio of 14.5. rules, and transparent procedures. Guillermo Bames, Director General of the * The mechanics of privatization should be Development Planning Unit of the Ministry of consistent with the legal framework and should Finance and a member of the Privatization be based on adequate, detailed preparation. Committee that supervised the program, sets out the preconditions, objectives, and main achieve- * The proceeds of privatization should be in ments of the privatization program. He summa- cash, which should be used to permanently rizes the Mexican experience in nine lessons that reduce government outlays. may be relevant for developing countries consid- ering similar exercises: * Common sense rules should be followed, such as selling the small banks first, ensuring The conditions suitable for privatization and economic certainty and confidence, centralizing the strength of the financial system are directly management of the privatization program, and related to the economy's general performance. ensuring honesty and transparency in the pro- Macroeconomic stability is essential for bank cess. privatization to succeed. The overall lesson of the Mexican experi- o Bank privatization must be complemented ence is that bank privatization should not be by the structural transformation of the economy, rushed. Mexico waited until 1990, when inflation to improve efficiency and productivity. was less than 20 percent a year and the banks were strong (their numbers had been reduced and * Financial reform must aim to strengthen risky ventures restricted), while meticulous competitive economic conditions and to enhance preparation set the ground rules for transparent the efficiency of the financial sector. and effective procedures. o Bank privatization requires a new legal framework, especially designed for private institutions. The Policy Research Working Paper Series disseminates the rmdings of work under way in the Bank. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the Policy Research Dissemninadon Center  Financial Policy and Systems Division Country Economics Department World Bank LESSONS FROM BANK PRIVATIZATION IN MEXICO Gulllermo Barnes  Foreword The recently completed privatization of Mexican commercial banks may be classified as one of tCe most successful financial operations of recent years. Within the spate of 13 months, the Mexican authorities were able to sell 18 banks to private groups of Mexican investors for a total price of over US$13 billion. Banks were nationalized in Mexico in 1982 in a panicky response to the dual economic shock of weakening oil prices and rising real rates of interest. During the nationalization period, the banking sector was consolidated into fewer units and was prevented from engaging in risky and speculative ventures. This avoided the accumulation of large volumes of nonperforming loans and facilitated the process of privatizatio.i. However, the smooth implementation of the privatization program was based on the promotion of macroeconomic stability, the pursuit of regulatory and structural reform and the adoption of clear objectives and credible and transparent procedures for the whole process. Guillermo Barnes, Director General of the Development Planning Unit of the Ministry of Finance, was a member of the Privatization Committee that supervised the whole program. In this paper, he sets out the preconditions, objectives, and main achievements of the privatization program. The paper is based on two presentations made by Dr Barnes to seminars organized by the Financial Policy and Systems Division of the World Bank and by the Economic Development Institute. Dimitri Vittas Principal Financial Specialist Financial Policy and Systems Division  Introduction This paper reviews briefly the Mexican experience with bank privatization. The success of bank privatization in Mexico has been facilitated by the macroeconomic stabilization policies pursued over the past few years, the relatively strong financial position of Mexican banks, and the good prospects for economic growth and expansion heralded by the closer ties with the United States and Canada under the proposed North American Free Trade Area (NAFTA). But the effectiveness of the program has also been based on the promulgation of clear principles and objectives for the privatization program and the adoption of transparent and credible procedures. The Mexican experience is summarized in 9 lessons that may be of relevance for other developing countries contemplating similar exercises. 1. The first and perhaps most important lesson is that privatizatlon conditions and the strength of the financial system are directly related to the general performance of the economy. The Mexican economy grew at an annual average rate of 3.8% in 1989-1991 and the rate of hastion fell from almost 200% in 1987 to 18.0% In 1991. The sustained nature of economic growth marks the end of a long period of economic crisis in Meaico and allowed a better privatization framework and a strong financial deepening. 1  In 1983 the country was facing a stagnant economy, severe macroeconomic instability, high inflation rates, and an increase ia the public sector debt. These were partly the consequence of imbalances caused by public sector policies, increasing real international interest rates, and the collapse of oil prices in the early 1980's. The second type of imbalances were structural inefficiencies generated, first, by an oversized public sector that owned too many state enterprises and overregulated the economy and, secondly, by protectionist trade policies that reduced foreign competition and weakened industrial competitiveness. To solve these problems, Mexico adopted a severe adjustment program to stabilize the economy. During 1983-1987 fiscal and monetary policies were tightened with a particular emphasis on fiscal adjustment. The program's early achievements were considerable: the primary fiscal balance, which excludes interest payments, moved from a deficit of 7.3% of GDP in 1982 to a surplus of 6% in 1991; and public expenditure was reduced sharply dure-g the same period. The administration of President Salinas, which took office in December 1988, condaued and tuned the prior administration's economic strategy to emphasize macroeconomic stabilization, structural reforms, and the reduction of poverty. 2  The stabilizaton strategy was based on momic pWram that included dght fiscal and monetary policies, a revised wage and priee control agreement between the government, business and labor, and the strengthening of the balance of payments. Stabilization policies were designed to: (i) Increase the public sector primary balance, which averaged a surplus of 7% of GDP in the period 1988-91. (ii) Renegotiate Mexico's foreign debt to reduce the problem of excessive Mexican savings transferred abroad. (iii) Reduce domestic credit to the public sctor and maintain a crawling exchange rate in order to further lower inflation. (iv) Maintain relative prices according to demand and supply conditions, avoiding indexing and reducing inflatdonary expecations. (v) Obtain economic agreements among diffent ctors in order to distribute evenly the social costs of adjustment. In November 1991, the Government sent to Congren the budget for 1992. This is the first budget in recent history which shows a public soctor suplus after including interest payments on domestic and foreign debt. For 1992, the pubec sector surplus, excluding futre privatization proceeds, is etmated at 0.8% of GDP. 3  Fiscal balance has helped achieve a decline in the rate of inflation to less than 1 percent a mnnth. During 1992, inflation is expected to be close to 10%. Real GDP is expected to grow at a rate of 3.5 percent. Investment, the main source of economic growth, showed an increase of 10% in 1991. Private investment is expected to grow at an annual rate of 12% in 1992. Real expansion of savings has permitted a large accumulation of international reserves and a further increase of credit to the private sector. The financial sector reacted according to the general performance of the economy. In 1991 the percentage of financial intermediation to GDP reached 44%. This figure was 33% in 1985. Lower inflation, economic growth and higher degree of stability increased the demand for financial assets. 2. The second lesson Is that privatization has to be complemented with a general structural transformation oriented to Improve efficiency and productivity. The financial sector reforms have to be consistent with the general structural trend of the economy. The Mexican macroeconomic stabilizadon program was complemented with a profound structural reform to increase productivity and improve overall market performance. The program was based on several strategies: trade liberalization, foreign investment 4  INFLATION (MONTHLY RATE) 14; 12k ._. 1 87l I 8 so s 1i 92 INFLATION F~ ORECAST SOURCIE. Banco de M6iuIco. GDP GROWTH (REAL GROWTH RATES) 3 2 2 1187 l988 199 19g90 1991 192 2 GOP GROWTH 1.7 1.2 .3 4.4 3. I FORECAST 4 9 :  M4 /CGP 60 .4 .1 11 304- * - - -- - 10 Y0aes Average 26.1'2.S25.5!26.5 20.t 2?.$l8. 32t3.9.5 gnd of Period 2712185 213. l. 148. fORECT - - _ _4 SCUR& lance do I&xee. DIVESTITURE XSTATE OWNED FIRMS) 100 0- - 0, ~ue Average ~ 9641.'3125I'6S;6.42 12?.196128.5j32.1135.3'01195992 |STATE FIRMS | t10r1SS 0o?l4s!941F| 3r 1 |412 i13791!260123 t aE OSWE FIRMS 6 8C:*:l600  promotion, privatization of state enerprises, deregulation, fiscal reform and financial sector reform. Today Mexico is an open and competitive economy. Trade lberalizaton policies evolved from a system based on import perr":I and quantitative restrictions to a general system based on tariffs. As a result, resources have been reallocated to highly competitive sectors and protection rents have been eliminated. Companies based in Mexico have access to international raw materials at competitive prices. This has allowed them to become internationally competitive and has fostered non-oil exports. Foreign investment plays an important role in Mexico as it complements domestic capital. To promote foreign investment, regulations were revised, and administrative procedures for approving foreign investment projects were simplified. Foreign investment is encouraged since it complements domestic investment with new technology, efficient market strategies and modem management. Foreign investment also enhances Mexican export capacity and provides domestic employment. Privatization plays an important role in the overall economic strategy. Mexico wants a strong and efficient public sector based on law and justice, not on the ownership of public enterprises. The public sector will maintain ownership and corntrol only of those strategic sectors as defined by the Mexican Constitution. The privatization policy has several objectives: to increase aggregate economic efficiency and productivity; to promote private 7  investment aitd technological change; to reduce pressure on the public budget; and to make available public resources o increase infrastructure and social investments. From 1155 firms owned by the government in 1982, including 18 commercial banks, Mexico still maintains ownership of p,ublic enterprises in 1992. In terms of value the cumulative sales have reached approximately 13 billion dollars (6% of GDP) up to 1991. These resources have allowed for better economic conditions in the country. Deregulation is another important element of the economic strategy. The basic objective is to create rules that promote business and entrepreneurial activity. As long as an economy remains overregulated, it increases the cost of doing business. The Mexican goal is to liberalize the economy and improve resource allocation and efficiency. This policy has helped curb down domestic price increases through greater competition. More generally, it has contributed to the establishment of a competitive market ircentive structure for the private sector. The fiscal reform objective is to incrase the efficiency and equity of the tax structure. On the one hand, tax rates have been reduced to a mnaximum level of 35%, which is considered an internationally competitive standard. On the other hand, the tax base has been expanded by including sectors which were traditionally excluded. Tax evasion also has been reduced.  Lower rates and a broader base tend to increse the equity of the system. Tax revenues have increased as a percentage of GDP. These policies have fostered the fiscal performance and the primary public sectoz surpluses observed in the past years. 3. The third lesson concerns directly tbe fAanclal sector. The reforms have to achieve an Improvement of competitive economic conditions and enhance the overall effi'ciency of the financial system. The liberalization has to include operatlonal and legal reforms. In 1988, Mexico deregulated interest rates by eliminating controls of rates and maturities on all traditional bank instruments. Restrictions on loans to the private sector were also eliminated and lending at below market interest rates to the public sector was discontinued. Financial reforms included changes in the reserve requirement system. Reserve requirements on deposits in pesos were initially replaced by a 30 percent liquidity ratio, which was recently reduced to zero. Foreign exchange deposits maintin a 15% reserve requirement. Today, Govemment instruments held to satisfy a voluntary liquidity ratio eamr maiket interest rates and are fully tradeable. To enhance the operating efficiency of banks and their ability to respond to changing market conditions, bank management was given more flexibility via the creation of boards of 9  directors with the power to oversee all operating and investment decisions faced by management. In December 1989, to further Arnancial liberalization and strengthen banks and other institutions involved in credit and stock market operations, Congress approved wide-ranging institutional reforms. The measures were intended to increase competition and reduce forced market segmentationt by expanding the scope of permissible activities for different types of institutions. They also allowed a greater degree of integration in the delivery of financial services. The reforms also eliminated government regulation of insurance premiums and policies, and deregulated and simplified the operation of mutual funds. Additionally, restrictions governing foreign investment in financial institutions were relaxed. In summary, modernization of the Mexican financial system was based on the liberalization of instruments and institutions and was complemented with better government superision of financial institutions. 4. Prlvatization of commercial banks In Mexico requhred a new legal framework, specially deswed for private Ilstutions. This principle provides the fourth lesson: privatizatlon of banks can be carried out only after having a solid and wel defined lel structure. 10  In 1990, the Governmmet launched two major iniiatves to allow the pdvaon of commercial banks and to establish the frmework for the formation of integated financial groups, envisaged as the maiorganitional structure of financial markets. On May 2, 1990, President Salinas submitted a bill to Congress to amend Articles 28 and 123 of the Constitution, permitting filll privte ownership of commercial banks. The new Credit Institutions Law, enacted in July 1990, allows commeril bank to be majority owned and controlled by the private sector. To ensure Mexican control of banks, four classes of bank shares awe provided for: "A shares which have to be at least 51 pcent of the ordinary capital, can only be held by Mexican individuals and are related to the strategic control of the bank; "B' shares that can be up to 49% of the ordinary capital depending on the number of C' sar issued and can be held by Mexican individuals, Mexican corporations, and mutual funds; 'C' shares that can be up to 30% of the ordinaLy capital and can be held by Mexican individuals, Mexican cozporations and foreign investors; and L' shares which represent the additional capital and can be issued in an amount up to 30% of the ordinary capital - these shares can be held by the same investors as C" Shares, but have limited voting rights. The law regulates banking and establishes the terms under which the State exerecis supervi on and control over the banldng system. Prior to nationition,he financial system was domiated by a few large banks with strong links to major indusial goups. The new regulatory provisions are intended to limit the concentin of credit risk, ensure 12  the separation of interests between banking, industry and commerce, and avoid conflicts of interest in the management of banks. Strong emphasis is placed on prudential regulation and supervision of banks. A comprehensive system for classifying loans according to their inherent risk was implemented with a requirement to create specific reserves for loan losses on nonperforming loans. In 1991 Mexican banks were obliged to constitute over a two-year period general reserves for up to 1 % of the average balance of their loan portfolio. S. The fifth lesson is that legal reforms should lead to structures that encourage solid and efficient financlal intermediation. Mexico adopted a financial legislation which opens the possibility of establishing a system of 'universal banking". The law pertaining to Financial Groups regulates and permits the formation, under a common structure, of groups of companies performing different financial functions such as banking, insurance, brokerage and other services. It ends the traditional separation of banking from other types of financial activities, and in particular, allows banks and brokerage houses to come under the control of a single holding company. But in order to limit the concentration of risk, ensure the adequacy of capital, prevent the pyramidation of capital and prevent conflicts of interests within the groups, the legislation restricts the presence of more than one type of intermediary within a single financial group, and prohibits members from investing in each other's or the holding company's stock. 12  6. The sixth lesson Is related to the special characteristics of the privatization process. In order to encourage ample partlilpatlon and assure fairness, the process must be trustworthy. Clear and precise rules for the entire privatization process are essential for this purpose. The privatization of the banldng system was initiated with a Presidential decree and had the following objectives: - Create a more efficient and competitive financial system. - Guarantee diversified participation and ownership of banks to promote investment in the financial sector and guard against ownership concentration. - Ensure high ethical standards and competence of bank management and obtain adequate capitalization levels. - Ensure Mexican control of banks, but without the exclusion of foreign involvement. - Promote decentralization and regional participation in the banking institutions. - Obtain a fair price for the institutions in accordance with valuations based on homogeneous and objective criteria. - Achieve a balanced financial system. - Promote fair and healthy financial and banking practices. 13  To oversee the whole process and bring it to fruition, a Bank Privatization Committee was fonned by Presidential decree and made responsible for the entire process. The Committee included govenment officials from all areas related to financial activity. The main responsibilities assigned to this group were the following: - establish criteria and general policies for the process; - fornulate a specific strategy for the sale of each bank; - assure transparency of the process with periodic communications to the public at large; - hire external advisers as needed; and - benefit from international experiences in banking privatization. 7. The mechanics of the privatization process should be consistent with the legal framework and specific guidelines of the banking system. The seventh lesson Is that adequate preparation of the mechanics of privatization should be made before starting the process. The Mexican bank privatization process consisted of four main stages. The first, preparatory actions, included: qualification and selection of the bidders by the Committee; writing each bank's sale prospectus; and announcing the auction and its rules. 14  The selection of bidding groups aimed to ensure that potential investors were experienced and of high moral standing and were able to male a positive contribution to the future growth of the banks. Only approved groups were allowed to participate in the auctions for each bank. More than 44 groups were approved and they presented in total 133 solicitations to acquire a bank. Each bidding group consisted of a core group that was allowed to invest in "A" shares. No foreign investors were included in the bidding groups, although after the completion of the privatization process, foreign investors were invited to participate in the ownership of different banks. During the first stage, several valuations were prepared for all banks. Each bank had an accounting valuation prepared following standard criteria. In addition, two independent financial valuations were made for each bank with the assistance of external advisers of international prestige. Obtaining objective valuations of banks is always a difficult exercise because of the information problems involved in assessing the performance of commercial and industrial loans. However, unlike the cufrent situation in most developing countries, Mexican banks were fortunate in that at the time of the privatization process they had relatively low volumes of nonperforming loans. To some extent, this was the result of the past imposition of heavy reserve and investment requirements on banks that forced them to allocate a disproportionate amount of their resources to government bonds. In addition, during the nationalization period, banks were encouraged to consolidate their operations and to build adequate reserves against loan losses. The number of banks was reduced from 60 at is  the time of nationalization to 18, of which 6 were nationwide institutions, 7 were multiregional banks and 5 were regional banks. Once the auction was announced, the second stage began. It consisted of the due diligence process carried out by each bidder. Qualified bidders had access to the process if they made a deposit and signed a letter of confidentiality, relating to all information obtained. It is important to point out that equal access was given to all bidders to information, bank visits and management interviews. The committee supervised the due diligence activities during the whole process. The auction itself was the third step of the process. After the due diligence process was completed, qualified bidders presented their bids. Fairness was guaranteed by the presentation of aU bids at the same time in the presence of public notaries. The Committee reviewed the bids and selected a winner based on the highest price offered, provided that this price was higher than the valuations determined previously by the Committee. In case of a tie, the following items were considered to award the bank: business plan, capitalization plan and the regional presence of the bidders. All winning bids were those with the highest price offered. The final stage in the process was the sale itself. The sale was decided by the spending-financing commission of the federal government, following the privatization 16  committee's recommendation. The government transferred its shares to the winning group once the group had paid the total value offered. Thirteen months after initiating the selling process, control of all 18 banks has been sold for US$ 13.5 billion. The prices that have been achieved are a result of the state of the banking system and of each individual bank. In all cases, the prices have been higher than the valuations obtained by the external advisors. The weighted average price-earnings ratio amounted to 14.5. In the U.S. and Europe an average of comparative bank acquisitions in the last five years reached a price-earnings ratio of 14. The weighted price-book value ratio was 3.08 versus an international average of 2.2. The price range that has been obtained reflects the health of the banking system, the modern legal framework, and positive expectations on the future performance of the Mexican economy. In addition to the quantitative results mentioned above, other important objectives have been obtained. In particular, a diversified ownership of the capital stock of the banks has been achieved. More than 130,000 private investors, including employees through special trusts, have participated in the process, while no individual investor has more than 10% of the stock of any bank. Additionally, the regional presence of the banks has been strengthened. The new bank owners come from aU states in the country. They will link the banks with their local economies and customers. 17  Buk PrivaIluen in Meo on lb Day of Sdo Ddb ofSo s; Book rAm V _Im P _&eM 1mM Ya fmfl~of GI hlarb Embfi m Pfrflt MERCAMilL Jun-01-91 $611.20 1.19% $297.6 (a) 2.66 x $62.2 (a) 12.73 x $69.3 11.43 x 8ANPAIS Jon-14-91 $544.99 IQO.00% $130.1 (a) 3.03 x $30.7 (k) 17.73 x $24.6 22.S x CREMI Ju-21-91 $743.29 66.70% $329.9 (a) 3.40 x $51.3 (a) 21.87 x $41.7 26.90 x CONFIA Ago-M2-91 $592.26 78.68% $304.0 (b) 3.73 x $53.9 (1) 13.52 x $108.6 10.44 a BANORIE Ago-9W-91 $223.22 66.00% $83.7 (b) 4.04 x $14.3 (b) 23.65 x $13.4 13.35 a BANCRESER Ago-16-91 $4S2.13 100.00% $163.5 (b) 2.60 x $1.4 (b) 50.45 z $48.6 8.75 x DANAMEX Ago-23-91 S9,74&98 70.72% $5,242.1 (c) 2.62 x $1,233.0 (c) 11.15 A $g,264.1 (a) 10.90 x BANCOMER Oct-25-91 $5,544.21 56.00% $5,111.3 (d) 2.99 a $975.9 (d) 15.67 x S,104.1 13.85 x BCII No-03-91 $571.36 100.00% $328.4 (d) 2.67 x $39.38 (d) 22.31 x 535.60 24.67 t SERFIN Enc-24-92 $2,32.74 53.00% $2,061.00 (e) 2.69 x $375.29 (e) 14.77 a $493.00 11.29 x COMERMEX Feb01-92 $2,706.01 66.54% $1,059.24 (e) 3.73 x $197.29 (e) 20.61 x $235.0D 17.31 x SOMEX Feb-23-92 $1,576.53 31.62% $695.57 (I) 3.31 x $105.20 (f) 21.25 x S150.00 35.33 a ATLANTICO Mag-27-92 $1,469.16 68.4% $4070 (5) 5.33 x $119.50 (g) 17.95 x $223.00 9.41 x PROMEX Abr-03-92 $1,014.47 66.00% $383.09 (g) 4.25 x $98.50 (g) 16.53 a S135W 13.16 x BANORO Abr-10-92 $1,137.51 66.03% $436.25 (l) 3.9S a $132.96 (h) 11.27 x $174.30 11.26 x BANORTE Jun-12-92 $1,77S.78 66.00% $633.05 (i) 4.25 x $213.21 (s) 12.62 x $230.40 11.63 x INTERNACIONAL Jun-26-92 $3,436.92 51.00% s937.05 (i) 2.95 x (S33.20) (i) N.A. $236.70 12.32 x BANCEN Jul-03-92 $569.38 66.31% $281.70 (i) 4.65 x $120.81 (i) 10.55 s $120.00 10.93 x SISTEMA $37,356.45 $19,010.76 $3,697.71 $4,696.75 *)W4US9bl. _Ihmpme baz35.33 50.48 26.90 b)hJut.N99M. Mb_ 2.60 11.20 6.75 *h bsquo1e 1"1. Avaw 3.49 17.50 14A5 *) hDseeo MI. St: rd DeYitbm 0.78 9.71 5.20 OhJmmy IWl.52 in Fh tsn Wedgod A ora 3.08 14.34 12.46 I) hof Mau do992.rA 1* b pg M. TMrftb M m - "gw t41 bfnpsi6 mo3 3-pceni 6of13 I) b w 1"1. hi twpks oh Cs39 Fadie hd_isO_bdm_ed eOdfed_m_s a ) l l u m b s d e l . p s s w a d . u .. i f s . I b a l e l , C m s a e i a u c a l a d 3 w q c e a l e , o l i m i m l i u a p ~ f e s _ a Ui.Iud  S. The eighth principle is that sales have to be In cash and privatizatlon revenues have to be used on permanent welfare Improvements. Privatization should be an irreversible process that intends to transfer the ownership of assets from the government to the private sector on a once and for all basis. Selling for cash is a transparent way of cutting the relation between the firms and the government, prevent future unpaid balances, or granting some type of government credit to finance the purchase of the firms. Once the sale is completed one has to decide the destiny of the transitory rwienues of the sale, in order to have a permanent impact on public finances. Prudence suggests that once and for all revenues should not be used to finance current spending. These resources should be used to reduce government outlays on a permanent basis. In the Mexican case the stock of internal debt as a percentage of GDP was reduced from 24.4% in December 1990 to 17% in December 1991, using privatization proceeds. This is expected to decline further to 13% in 1992. A smaller public debt reduces government outlays on interest payments and allows a transfer of government outlays to social programs. 9. The last lesson is that one has to foUlow common sense rules to have a succesfdl privatization experience. Some of these rules are: 19  9.1 Start privatizing small fhrms first. There are several reasons to be prudent about the timing and the sequence of any privatization process. Learning the technical facts involved takes time and it is important to minimize risks. Mistakes made seUing a small firm are not as important as those privatizing a large bank, the telephone company or a major airline. 9.2 Ensure economic certainty and confidence through macroeconomic stabilization and market-friendly regulatory and structural reform. These conditions allow public sector firms to be sold at higher prices. The timing and planning of the strategy requires both a stabilization program and a privatization scheme. 9.3 Centralize the management of the whole process. In practice this means having a single responsible office which would preside over the firm's board and the general manager, would establish the proper strategy, would deal with all potential buyers, and would supervise all legal requirements. 9.4 Ensure honesty and transparency in the whole process. Credibility has to be gained and people have to know that everything is done according to the law and honestly. Detailed information has to be given to the mass media, which include characteristics of the buyer, forms of payment, etc. Congress and the General Comptroller must be briefed on a continuous basis. 20  Conclusion In conclusion, it can be claimed that the bank privatization process in Mexico has achieved all its short term objectives and has also laid the foundations for the pursuit of the longer term objectives. Among the former, the privatization process has succeeded in ensuring Mexican control of banks with diversified ownership and regional participation. It has also obtained high but fair prices for all the banks. As regards, longer term objectives, bank privatization has laid the foundations, in conjunction with the reform of bank and financial regulation, for creating an efficient and competitive, but balanced, financial system, enhancing operating efficiency and ethical standards, and developing fair and healthy banling and financial practices. 21  BibUography Aspe P. (1991): 'Thoughts on the Structural Transformation in Mexico: The Case of Privatization of Public Sector Enterprises". Mimeo. Secretaria de Hacienda y Credito Publico. June. Barnes, 0. (1991): "Modernizacion del Sistema Financiero Mexicano", en La Modernizacion Bancana y Financiera, Revista de Administracion Publica no. 81, INAP. Mexico. Forsyth, P.J. (1984): "Airlines and Airports: Privatization, Regulation and Competition', Fiscal Studies 5 (1). Jones, L. P. (1982): PubUc Enterprise In Less DeveloPed Countries. Cambridge University Press. Ortiz, 0. (1991): "Lineamientos Generales de Desincorporacion Bancaria". Septima Reunion Anual de la Banca, El Mercado de Valores. Mexico, noviembre. S H C P (1992): EI Proceso de Enajenacion de Entidades Paraestatales", Unidad de Desincorporacdon de Entidades Paraestatales, Secretaria de Hacienda y Credito Publico. Mexico, febrero. Van de Wall (1989): 'Privatization in Less Developed Countries: A Review of the Issues", World Development (17) 5. Vickers and Yarrow (1988): Privatizatlon. MIT Press. Cambridge, Mass. 22  Policy Research Working Paper Series Contact Title Author Date for paper WPS1006 Preparing Multiyear Raiiway Jorge M. Rebelo October 1992 A. Turner Investment Plans: A Market-Oriented 33933 Approach WPS1007 Global Estimates and Projections Rodolfo A. Bulatao October 1992 0. Nadora of Mortality by Cause, 1970-2015 Patience W. Stephens 31091 WPS1 008 Do the Poor Insure? A Synthesis of Harold Alderman October 1992 C. Spooner the Literature on Risk and Christina H. Paxson 32116 Consumption in Developing Countries WPS1 009 Labor and Women's Nutrition: Paul A. Higgins October 1992 C. Spooner A Study of Energy Expenditure, Harold Alderman 32116 Fertility, and Nutritional Status in Ghana WPS1010 Competition and Efficiency in Dimitri Vittas October 1992 W. Pitayatonakarn Hunqarian Banking Craig Neal 37664 WPS1 011 How Tax Incentives Affect Decisions Robin Boadway November 1992 C. Jones to Invest in Developing Countries Anwar Shah 37754 WPS1012 The Brady Plan, the 1989 Mexican Haluk Unal November 1992 W. Patrawimolpon Debt Reduction Agreement, and Bank Asli Demirgii-Kunt 37664 Stock Returns in the United States Kwok-Wa. Leung and Japan WPS1013 The Impact of Mexico's Retraining Ana Revenga November 1992 D. Young Program on Employment and Wages Michelle Riboud 30932 Hong Tan WPs1014 Ethnicity, Education, and Earnings George Psacharopoulos November 1992 L. Longo in Bolivia and Guatemala 39244 WPS1015 Benefit Incidence Analysis in Thomas M. Selden November 1992 C. Jones Developing Countries Michael J. Wasylenko 37754 WPS1 016 Europe and Central Asia Region, My T. Vu November 1992 0. Nadora Middle East and North Africa Region Eduard Bos 31091 Population Projections, 1992-93 Ann Levin Edition WPS1017 Rural Poverty, Migration, and tha Richard E. Bilsborrow November 1992 WDR Environment in Developing Countries: 31091 Three Case Studies WPS1018 Tariff and Tax Reform: Do W'orld Anand Rajaram November 1992 P. Pender Bank Recommendations Integrate 37851 Revenue and Protection Objectives?  Policy Research Working Paper Serles ContLct Tltle Author Date for paper WPS1019 How Effective are Directed Credit Anita M. Schwarz November 1992 M. Raggambi Policies in the United States? 37664 A Literature Survey WPS1020 Another Look at Population and Nancy Birdsall November 1992 S. Rothschild and Global Warming 37460 WPS1021 Measuring Weifare Changes from Jonathan R. Coleman November 1992 D. Gu'stafson Commodity Price Stabilization in Chris Jones 33714 Small Open Economies WPS1022 A New Approach to Evaluating Trade James E. Anderson November 1992 M. T. Sanchez Policy J. Peter Neary 33731 WPS1023 Tariff Index Theory James E. Anderson November 1992 M. T. Sanchez 33731 WPS1 024 An Exact Approach for Evaluating Will Martin November 1992 D. Gustafson the Benefits from Technological Julian M. Alston 33714 Change WPS1025 Openness and Economic Kazi M. Matin November 1992 D. Ballantyne Performance in Sub-Saharan Africa: 38004 Evidence from Time-Series Cross- Country Analysis WPS1 026 Financial Liberalization and Paul D. McNelis November 1992 A. Maranon Adjustment in Chile and New Zealand Klaus Schmidt-Hebbel 31450 WPS1 027 Lessons from Bank Privatization Guillermo Barnes November 1992 W. Pitayatonakarn in Mexico 37664