Introduction – The Queen Comes to Sicartsa

The Queen Comes to Sicartsa

IN FEBRUARY 1983, the Britannia, Queen Elizabeth’s royal yacht, carried Her Majesty to the port of Lazaro Cardenas on Mexico’s west coast. The Queen’s mission: to inspect Sicartsa, an integrated steel plant deserving of the Crown’s attention, near the remote town of Las Truchas. Phase I of Sicartsa was built and operating, and Phase II’s construction was about to begin. One year earlier, the British firm of Davy McKee had won the lion’s share of new construction work at Sicartsa: $600 million of the entire $2 billion expansion. But Mexico was now facing a balance-of-payments crisis, and the government of Mexico was considering canceling phase II.

As the Britannia docked, Davy McKee agents milled on the pier with those of Lloyds Bank International. Lloyds had done far more than simply arrange private financing: it had helped Davy win the bid in Mexico and win government support back home. Neither the supplier, its banker, nor the U.K. government intended to let Sicartsa slip away. Queen Elizabeth came to silence any murmurings of this possibility in Mexico or elsewhere.

Sicartsa was no ordinary project: not many steel mills in backwaters within the Third World invoked a defense by the British Royal Family. But then neither was Sicartsa that different. The saga of Sicartsa helps explain how developing countries were able to borrow massive amounts of money for projects devoid of economic sense.

THE DREAM OF EXPLOITING Mexico’s iron ore deposits goes back half a century. In the early 1940s, President Lazaro Cardenas — who in 1938 had expropriated Mexico’s foreign-owned oil installations — conceived the idea of a steel complex at Las Truchas, part of his political base. With his death, the baton was passed to his successors, first to President Diaz Ordaz and then to President Echeverria, who in the early 1970s turned for technical advice to the British Steel Corporation and the world’s largest international aid agencies — the World Bank and the Inter-American Development Bank.

By 1973, Mexico had a plan that seemed driven more by politics than by economics.

Sicartsa, or Siderurgica (Steelworks) Lazaro Cardenas-Las Truchas, takes its name from Cardenas. The Mexican government would fashion the massive steel complex — a `Pacific Pittsburgh’ — in four phases, each to be built in the term of a different Mexican president. President Echeverria, who put economic independence from the U.S. atop the national agenda, would preside over creation of the first phase.

Constructing Phase I of Sicartsa alone required a herculean effort. The site chosen for this modern monument was so isolated — no main roads linked the project to the rest of the country — that an entire infrastructure would need to be created: houses, services, schools, shops, utilities. Not even a method for bringing in the massive amounts of coal required by Sicartsa’s blast furnaces existed. A port would have to be built, workers and their families would then have to be brought in, and the population would need to increase almost tenfold, from 7,000 in 1970 to over 60,000 by 1976.

Once the infrastructure for Phase I was in place, the blast furnaces, the rolling mills, and nearly a dozen other major components would be required before the mill produced steel.

Financing a project as large and unlikely as Sicartsa should have strained the credulity of the staid banking world. Yet the financing was remarkably easy to muster. Sicartsa executives, again on the advice of the World Bank and the Inter-American Development Bank, toured the industrial world for financing, and easily found willing lenders. The president of the U.S. Export-Import Bank offered to finance the entire project if Mexico bought only U.S. equipment. Loans were so plentiful, however, that the Mexican government decided instead to diversify its suppliers — creating what some called “a United Nations of suppliers.”

The French firm Fives Cail Babcock won the contract for the concentrator; Germany’s Lurgi Chemie and the United Kingdom’s Head Wrightson won the pelletizer contract; coke production would go to Nippon Kokan Kaisha of Japan; and the blast furnaces to Italimpianti of Italy. Voest-Alpine of Austria won the oxygen converter contract; Schloemann Concast of Germany and Canada the contract for the continuous caster; and Davy Loewy of the United Kingdom would build the rolling mills. Eleven foreign countries in all would work on the Sicartsa steel plant.

A United Nations of suppliers for Sicartsa Phase I brought with it a more than willing United Nations of financiers. Each country with a share of the action made sure money was available.

The European banks offered $180 million, nine governments of industrial nations $170 million, the Inter-American Development Bank $54 million, and the World Bank $70 million. Mexico only needed to provide the remaining $86 million, or 15 per cent of the total.

As with so many mammoth projects, once construction began Sicartsa’s cost overruns grew alarmingly. Phase I was supposed to cost $560 million. By New Year’s day, 1977, when a completed Phase I began to produce reinforced bars, wire rods, and light steel shapes, its construction cost had almost doubled, to over $1 billion.

Phase I was an economic disaster for everyone except the suppliers. Sicartsa Phase II was consequently shelved while the Mexican steel sector lurched under devaluation, recession, economic restructuring, and eventually a reorganization. Then in 1979, in exchange for access to Mexican oil at market prices for ten years, the Japanese government lent Mexico $150 million to help Japanese suppliers secure Sicartsa Phase II. While the Japanese were confident that they had secured the most lucrative parts of Phase II, competing governments of the U.S., the U.K., France, and Germany prepared to do battle to win those same contracts for their own exporters.

The Mexican negotiators used this competitive atmosphere to manipulate the players in each of these countries, prodding each one’s exporters and banks to push their home governments to offer more sweeteners than their competitor nations. As if in orchestrated response, each national alliance of suppliers, banks, and governments from the five countries rolled out its full arsenal of trade support: official export credits, insurance, rediscounting, grants, soft aid loans, and guarantees for commercial bank loans.

The battle ended with the unlikeliest winner: the notoriously inefficient United Kingdom beat out the Japanese, the world’s most efficient steel producers, on the prized $596 million plate mill, the key component of the steel plant. The U.K. coalition of suppliers and financiers — Davy McKee, Lloyds Bank International, and the British Department of Trade — had marshaled the necessary public funds to undercut the less heavily subsidized Japanese bid. According to one senior official from Sicartsa, Britain won the plate mill because, politically, it “had its act together.”

A recent book from the Harvard Business School interviewed executives from Sicartsa and the major bidding firms and their banks in Britain, France, Germany, Japan, and the U.S. It found that “neither the sellers, the lenders, nor the exporting government officials would assert that the mill made economic sense. They pursued the transaction, not because of Mexico’s needs, but because of their own needs at home…. Few players carefully analyzed the economics.”

Sicartsa is far from exceptional: Mexico’s nuclear expansion program seemed so potentially lucrative to Western salesmen that, as with the Sicartsa steel scheme, heads of state attempted to secure sales. French President François Mitterand, Canadian Prime Minister Pierre Trudeau, and Swedish King Carl Gustav each traveled to Mexico City to present multibillion-dollar financial packages tied to their country’s nuclear power technology. Competition between the five nations vying for Mexico’s $30 billion nuclear expansion program became intense, with each supplier proffering an array of financial incentives. Canada offered $1.5 billion in export credit loans and another $4 billion from a special pot of money that its Cabinet could tap for loans deemed to be in Canada’s “national interest.”

The same star-studded international cast prominent in Mexico’s development projects are also prominent in many other development projects in many other Third World countries. Together they lent vast sums of money, each for their own reasons, that would eventually shake international financial structures.

Sources and Further Commentary

I am indebted to the work of Professor Philip A. Wellons from the Harvard Business School on the Sicartsa steel project. Using Sicartsa as a case study, his book, entitled Passing the Buck: Banks, Governments, and Third World Debt, from the Harvard Business School Press, Boston, Massachusetts, 1987, shows how special interests (including those of politicians), poor regulation, and a modern-day mercantile system led borrowers and lenders to invest billions in a megaproject that made no economic sense. Professor Wellons describes the relationship between exporters, their bankers, and their governments, the tension between them, and the alliances they form to win massive export credits. The end product, says Professor Wellons, is mercantilism. Passing the Buck, which is based on extensive interviews with the various participants in the Sicartsa loans, provides superb detail of the factors and interests that led to the go-ahead for this economic boondoggle.

Other excellent sources of information on Sicartsa include: Las Truchas: ¿inversión para la desigualdad? by Ivan Restrepo, Margarita Nolasco, Maria Pilar Garcia, Daniel Hiernaux, Elsa Laurelli, published by Centro de Ecodesarrollo and Ediciones Océano, Mexico City, 1984; “Paths to growth: a steel plant shows how U.S. and Mexico differ on development” by Mary William Walsh in The Wall Street Journal, May 2, 1986.

According to reports in The Financial Times, U.K., the British government had a lot on the line with Sicartsa: if the deal crashed because of Mexico’s financial crisis, “it is the British taxpayer who will suffer, as the government has pledged to compensate in full the leading British company involved, Davy McKee of Sheffield.” See “Acapulco welcomes the Queen” and “Dinner awaits Queen in Acapulco fort” in The Times, U.K., February 19 and 17, 1983, respectively.

The World Bank made a $70 million loan in 1973 to help finance the first phase of Sicartsa, and $76.3 million in 1984 for improvements in the Lazaro Cardenas Industrial Port. The Inter-American Development Bank lent $54 million in 1973 to finance foreign and Mexican components for the purchase of equipment and for contingencies, price adjustments, interest during construction, inspection and supervision. The IDB subsequently approved a loan in 1976 of $95 million for the second construction stage of Sicartsa but the loan was canceled by Mexico and no disbursements were ever made. See correspondence from Robert Kanchuger, Principal Country Officer, Mexico, World Bank, dated October 12, 1990 to Probe International, and correspondence from William M. McWhinney, Canadian Executive Director, IDB, dated May 17, 1991 to Probe International.

The Overseas Development Administration in London refused to release any information on their involvement in the Sicartsa steel plant “for reasons of client/customer confidentiality.” See Unclassified Facsimile from the British High Commission in Ottawa to Probe International dated April 15, 1991.

In early 1991 the Mexican government sought equity participation by Japan’s top steelmakers and trading houses in Sicartsa. According to The Wall Street Journal the Mexican government is said to have asked the Japanese to buy about $3 billion of its stock, but the reaction was cool. See “Mexico seeks steel backing” in The Wall Street Journal, February 27, 1991.

Details on Mexico’s nuclear power expansion program and the exporting countries can be found in The Globe and Mail, Toronto: “Bidding is keen to supply Mexico’s huge nuclear needs,” December 14, 1981; “Candu financing plan set for Mexican bid,” January 12, 1982; “Candu hopes pinned on Trudeau’s journey,” January 16, 1982; and “Canada among the battlers for Mexican nuclear plum,” January 25, 1982.