Mr. Carlos Slim delivered a keynote address to the 26th Civil Engineering National Congress
Mexico City, November 16, 2011
The 26th Civil Engineering National Congress was carried out in November 16-18 in Mexico City. On November 16, Mr. Carlos Slim delivered a keynote address on the world and domestic current economic situation and Grupo Carso’s economic and social activities in Mexico.
The event was carried out in Mexico’s Civil Engineers College. Mr. Slim’s keynote address was “Infrastructure Development: A Modern Outlook”.
Infrastructure Development: A Modern Outlook, by Mr. Carlos Slim
Good afternoon. I am pleased to be with you all, thanks to an invitation by Mr. Manuel Salvoch, president of Mexico’s Civil Engineers College. Thanks, Manolo.
I also hail all of my colleagues, and above all I am very pleased in sharing with so many professors and advanced students coming from many parts of the country. I congratulate all of you for participating in that congress.
Before going into the matter, I am going to echoing some remarks I was just chatting with Manolo about the global economic situation and the developed countries critical problems.
The first one country in experiencing that kind of problems was Japan in year 2000, and then followed the United States and Europe. Current wars are also taking their toll. All of these countries have been thwarting their current problems with aggressive fiscal and monetary policies.
The situation is critical and, in my opinion, it is the consequence of both technological development and the concomitant civilizing change which has proven to be very complicated to manage on. Since the post-war period up to the present time, all of these countries have been committed in providing welfare state on the basis of industrial society’s health-care and life-expectancy parameters, among other things, not on the basis of service-based society.
As a result, in spite of constant economic growth and bigger tax collecting, these countries have accrued huge fiscal deficits. Some of them have amounted 35%-40% in respect to GDP. That means that, in spite of both economic growth and increasing tax collecting, they have not collected money enough to pay off for their own expenses, so they have to borrow from both domestic and foreign markets to finance them. Needed changes have been largely delayed.
That problem has caused a crisis in Europe and, as I was saying, its roots lie upon a mix of excessive expenses and technology change.
Since the very origins of human kind, technological change has been crucial for social progress. Through the ages, fire, wheel, irrigation systems, and sail navigation, among many others, have stood for some of them. Early societies were primary-goods producers. Then industrial society came being accelerated by internal-combustion engine and power. The current society is a service-based one because of powerful telecommunication and computer technology allowing us to get communicated at light speed. That technology diffuses itself at a fast rate and diminishing costs.
As a result, many productive activities are currently performed by lessening workforce, so forcing many people out of job posts. In spite of bountiful technology which translates itself into growing productivity, easier output, and lessening good and service costs, governments have proven to be unable in conducting the concomitant civilizing change. That situation seems to resemble the social change from nomad tribes to post-glaciations sedentary societies because of fishing, fruit collecting and agriculture in earthy paradises.
Such a change was very simple and natural, so to speak, yet people did not conclude “we are going to stay nomad, otherwise people wouldn’t be employable.” Instead they became sedentary and began to advance into fresh knowledge and to create newer social relations.
Current difficulties in conducting social change seem to arise from complex social relations. As I was saying, developed countries are lagged by bad public finance and both huge fiscal deficits and debt which financial markets are not willing to afford because of risk aversion. That situation resembles the ones we Mexicans experienced in 1976, 1982, 1987 and 1995.
During third-world past crisis, developed countries and multilateral institutions used to impose severe adjustment plans upon us which, in turn, did provoke both GDP and consume deep slumps. The last developing-country crisis was Argentina’s in 2002, when GDP diminished 14% while consume fell about 30% in one single year. It was a big crisis and we all know its consequences.
Such is the current situation for the developed countries. During past developing-countries crisis, costs were paid by consumers, while developed-countries ones were paid by savers. The resulting imbalances were corrected by near-to-zero interest rate monetary policies, so savings shrank because yielding fell down inflation rate.
In the current crisis, developed countries have adopted both measures: very low interest rates and restrictive fiscal policies. In spite of its severity, the recipe is postponing, rather than solving the problem. Governments are not approaching the structural problems, firstly retirement age, which remains to be 60 years old, while current life expectancy is 80-85 years old. Most of us present in here would get retired 10-15 years ago.
Abiding retirement age seems to be absurd in a knowledge society where experience and knowledge, not physical ability, stand for fundamental human resources. I think that such is the main structural problem to be solved.
Abiding health-care criteria is another structural problem amounting big expenses. Because of larger life expectancy, costly chronic-degenerative disease cases have grown. By instance, treating cancer or cardiovascular illnesses is costlier than supplying vaccines, while incipient genomic research & development has not found economic remedies yet, so health-care costs will get amounting for many years to come.
So, I see that, like Japan’s, the current economic situation is burdensome. Because of high public indebtedness, some public debts have been curtailed and, as a result, some banks have entered into financial weakness by punishing their own financial assets while, at the same time, they are urged to increase their own capital in support of their own operations.
By falling short of needed capitalization, these banks will contribute to restrict commercial credit or to incur in credit crunch as it is named. Unavoidably, they will have to adjust themselves, so the next coming years will be hard for Europe and Japan. The United States situation is slightly different because nobody can impede the easy way out by printing dollars, yet the U. S. problems are very serious too.
In spite of healthy finances, that scenario will rebound in all of developing countries. It is noteworthy that Latin American countries, especially the more advanced ones, including Asian and Middle East countries, have no financial problems at the present time. Our commercial banks are relatively healthy. Since two or three years ago, Mexico has restricted foreign-owned banks’ foreign transfers in order to protect domestic commercial credit –a good policy, I think.
Banks in Latin America are basically healthy, and fundamental financial positions of strongest Latin American countries are reasonably good.
However, since we have favored the external sector and ever-growing imports from the 1982 crisis up to the present time, we have neglected the domestic market development, as I have said since several years ago.
I think that we have to look for domestic market development as an alternative policy to an eventual exports fall, as China is doing it since two or three years ago.
Mexico, Chile, Argentina, Brazil, Colombia, China, India and Russia, even beyond the BRICS, including Middle East countries having sizable income, have sound economic and financial conditions which, in a context of global crisis, allow us many opportunities for economic growth. We have to profit from them. What they are?
First, we have both sound public and commercial finance; second, developed countries long-term interest rates are now very low or negative, a circumstance that will probably endure until the current crisis got overcame at least. That situation allows us to surpass the traditional financial bottleneck of scarce and costly financial capital for urgent needs and big projects.
Since 1991 or so, about twenty years ago, foreign markets got opened for so-called emergent countries. Such openness has been very important for long and medium-term projects, yet it has been circumscribed to obtaining capital through capital shares or strict collateral provisions.
That situation has lingered itself for so many years and it has became apparent during the ongoing global crisis. Let me give you just a fact: in 2000, about twelve years ago, the foreign interest rate was 6.5%; nowadays is 0.20%, almost zero, a substantial diminishing.
So, we have low interest rates and abundant resources, while investors look for income-producing projects. Disgracefully, lax monetary policy encourages financial activities and hot money instead of productive projects. That’s the reason for derivatives and commodity volatility, so capital is not going into real economy. Thus, countries are impeded to solve their own problems.
In respect to Mexico’s real economy, the critical area is infrastructure. Of course, we are called to work on education, health, and human capital, which are critical for that new civilization. Yet, the most pressing thing is infrastructure.
Before the inauguration of President Felipe Calderón’s administration, Doctor Felipe Ochoa, a renowned expert, made a catalogue of infrastructure projects. The Engineers College has worked a lot on this field and it made a study concluding that we should invest 6%/GDP in infrastructure, 65 billion dollars annually at least. Such is the big challenge.
Not so many years ago, we were worried about supposed lack of engineers. However, once we started to work on real infrastructure projects, we realized that we have engineers in excess. In fact, we have enough economic resources and domestic engineering to cope with our infrastructure needs. There is no human capital bottleneck.
We in Grupo Carso had tested that picture in Mexico’s telecommunication industry before. We invested four billion dollars in a single year. Last year we invested about two billion dollars, and we never suffer from engineers and human capital scarcity. In fact, all of our projects were performed by Mexican workforce.
The only problem we have is designing additional projects. In order to avoid bureaucracy, we already have made a program for financing basic engineering in support of public infrastructure projects. That was about six years ago. Design work can be made either by private or private-public investment. We have just reviewed the projects on the make and have not discerned neither technical nor financial bottlenecks.
Just an obstacle just remains: having these projects working on from the very beginning. Fortunately, most of them will be effectively working on during the first years of the next federal administration, so we will avoid the typical braking-starting government cycle, and businesses, engineers and labor force will keep working continuously.
Let me go back to domestic economy. Domestic economy means looking for bigger domestic activity, the big thing. We need bigger economic activity to create more jobs. What is to be done? What are the seasonable areas for creating additional jobs during the next 5-10 years? How many job posts should be created?
It seems too obvious that in the next few years, about 80% job posts will be service jobs, I mean 75 or 80 out of 100 job posts will pertain to the service sector. In the United States that relation is about 85%. The industrial sector has about 10%-12% job posts. The primary sector has about 0.5% job posts.
That is a global trend and it is growing on. That is the big civilizing change to lead on. Agriculture and industrial workforce will be lesser and lesser. Services stand for the bigger occupational sector. What are the most job-demanding areas? Information technology is one of them, obviously; it stands for present and future job creation; it also stands for the most efficient economic sector in respect to both domestic and global activities, public and private, big, medium and small-size firms.
We have been intensively working in that field during the last several years. As a matter of fact, the telecom sector stands for a growing job-creation sector; it is also an improving competitiveness sector. In fact, our competitiveness has grown to world levels.
Infrastructure building is another big job creator. Water-service management and sanitation have grown much during the last few years, yet there is a lot to be done. Investment should be three more times bigger. Water networks should be overhauled. Water loss is about 38%-40%. Technology for that work is available. We should put hands on the job.
Highway building progress has been very important, yet there is much to be done. Railroads need a big impulse. Telecommunication’s growth is unprecedented yet, as a highly capital demanding activity, it needs much more investment. In airports and seaports there are many things to do. And there are many other fields demanding investment projects and workforce.
We are also called to be more qualitative in making decisions. By instance, we have made some mistakes in house location. I have been told that there are many abandoned new houses and that many of them are very distant from workplaces, about two hours in transportation, so they do not solve housing needs.
In Mexico City there are big areas being apt for urban projects, yet they remain inhabited because of lack of low and middle-class housing projects. By instance, in Guerrero, Doctores, Pensil, and Azcapotzalco districts there are many former industrial areas to be transformed into urban-housing districts by introducing public services. Mexico City should be a service-city mainly.
Rural activities are in need of especial support. We in Grupo Carso are already working in them. As we know, about 25% of Mexican population, 25-30 million people, live in the countryside. I have heard that the federal government is considering creating an agriculture and forestry development bank. The countryside should be supported by avoiding past mistakes.
Development banks should be supported much more. Brazil’s BNDES is already financing building projects outside Brazil itself in the form of service exporting. We need to create a similar bank, besides the many we already have, which need to be transformed to serve development financial needs well.
As we know, middle and medium-size firms stand for our biggest job creators. We need to support them by easing official steps. Transaction costs should be curtailed about a half for them. They should be allowed to start operations from zero steps and then notify the authority. Financial capital access should be facilitated, of course.
Tourism has been harmed by several adverse factors. Since 2008, increasing exchange rate has been one of them. Fortunately, that problem is already solved. The influenza epidemic was another. Yet, the bigger problem has been Mexicana airlines bankrupt, which being just an insolvency case, inexplicably led to interrupted operations. In the United States, bankrupt airlines are subjected to judicial financial restructuration and allowed to keep operating in the meanwhile.
Environment investment stands for another important area. Health-care, education, entertainment, cultural activities and sports are very important as job creators.
We in Grupo Carso have had many activities, but we have abandoned many of them of late to concentrate efforts in high-priority areas, telecommunications mainly, where we face a little obstacle for unraveling further investment. Unfortunately, our biggest competitor is not investing much because of its own limitations. They use to state that they are already covering about 80,000 communities across the country. We effectively cover 140,000 communities, which mean that we have 100% market share in 60,000 communities.
We already provide access to our competitors’ call-terminations at official rates, yet they argue that our market-dominancy percentage is high. That’s the reason we have lessened our telecom-service covering investment.
The government of Equator has understood and accepted our position and has said to us: “Go ahead by investing in covering”. In Mexico, on contrary, investment keeps to be refrained.
In respect to telecommunication-service penetration in Latin America, we barely surpass Nicaragua, staying behind the rest because of low investment during the last three years. Our penetration rate in Mexico is about 88%; Brazil’s is 120%, other countries have 100%, while the Latin American average is about 105%. We equate Peru, which has reached up by coming from a very low rank. We are staying behind and we will keep so as the current criteria abides.
But in the places we already cover, we are well advanced, entering into the fourth-generation telecom technology. We are going to promote smart-phone use, which is low by now, about 8%. We are aggressively extending broad band service across the country and providing high-tech technology to small and medium-size firms through the cloud, which I don’t understand well, yet I know that our servers and data centers will substantially lessen firms’ costs through it.
In respect to IDEAL telecom infrastructure we have invested about 7,000 million dollars in the last five years.
IDEAL is an enterprise which locates itself among the project and the investor. Once a concept evolves into a project, the finished project can be sold or marketed to obtain additional capital for financing further projects. So, investors become able to make decisions on solid grounds.
As you know, we have strongly fostered construction. Creating big domestic construction firms is very important. There are many already working.
In respect to financial services, we owe one of the two big Mexican financial institutions.
Our foundations work hard in creating human capital by providing health-care services, nutrition and early education from six-month infants up to higher education.
In respect to education and health care, technology is critical. We have no financial capacity to create the needed university campuses. Digital university is the real option. Through it we could provide higher education for 80%-90% of the population. In the United States, MIT is already putting all its programs, libraries and materials on Internet.
We are committed to provide internet universal access in 2015. We will have digital libraries and offer computer equipment to be activated by personal chips for everybody.
We will also lend laptops to navigate in home. We are already developing many digital applications. As to my knowledge, we are in a very advanced step.I thank you much.