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Dec 5, 2013 | 11:24 GMT

4 mins read

Mexico Moves Toward Political and Energy Reforms

(ALFREDO ESTRELLA/AFP/Getty Images)
Summary

Mexico's legislature has approved a landmark political reform that will serve as a stepping-stone to Mexican energy reform that is all but certain to pass in some form or another in the coming months, possibly before the end of the year. Though the political reform has only been passed by the Senate and must still receive approval from the Chamber of Deputies, it is clear that the stage has been set for the energy bill to be debated in the Senate. According to multiple reports, the energy bill will be presented this week to the Senate committees for energy, constitutional questions and legislative analysis.

The energy bill alone represents a landmark piece of legislation for Mexico. That it was coupled with a major overhaul of political rules should not be overlooked, however, since those political changes will have a major impact on Mexico's future.

Because the reform package will include changes to the country's constitution, the ruling Institutional Revolutionary Party (PRI) needs the National Action Party (PAN) as a partner in order to pass the reform through the national legislature. The constitutional changes will then have to be approved by a majority of state legislatures. This complicated process requires a clear commitment from both parties to the cause, otherwise it could easily fall apart. Mexico's third major party, the Democratic Revolutionary Party (PRD), is firmly opposed to the energy reform and can be expected to support widespread protests in the coming days. But it is unlikely to be able to block the reform. The PRD's particular objection is to any potential changes to the ownership of energy deposits, which are currently guaranteed to the state by Article 27 of the Mexican Constitution. This has, until now, made the industry-standard production-sharing agreement contracts and concessions impossible in Mexico because they require that investing energy companies be able to claim part ownership of oil reserves.

The details of exactly how the energy reform will be enacted have been emerging and changing slowly over the past few months amid heightened political rhetoric. There is little to no chance that national oil company Petroleos Mexicanos, widely known as Pemex, will be privatized in any way, and national electric company CFE will also remain in public hands. Nevertheless, the reform will almost certainly include constitutional reforms, including to Article 27.

Mexican Energy

According to media reports, the PRI was initially hoping to propose a profit-sharing model; however, according to other media reports, the two parties are still debating exactly what contract structure will be necessary. PAN politicians have said that they are wary of supporting profit-sharing agreements alone because they are not attractive enough to foreign investors. This is a crucial point, since the success of the reforms will depend on the country's ability to attract the foreign investment and technology needed to explore and develop Mexico's offshore conventional oil deposits and onshore unconventional oil and natural gas deposits. With PAN support for multiple types of contract models, it seems increasingly likely that the reform will build in enough flexibility to facilitate attracting foreign companies.

Addressing Structural Issues

While the commencement of energy reform is garnering most headlines, the political reforms passed this week may prove to be equally important for different reasons. The political reforms were the PAN's condition for cooperating with the PRI on energy reform, and with them out of the way energy reform can proceed. But their impact goes further than that. Among other changes, the political reforms permit lawmakers and mayors to serve two terms in office, rename and give more autonomy to the Federal Electoral Institute (now known as the National Electoral Institute) and grant autonomy to the attorney general's office, with Senate approval of attorney general appointees. The reforms go a long way in addressing structural issues that have historically stymied the political system.

Granting new autonomy to the election authority and the federal investigative body are straightforward efforts to reduce political corruption and influence over key processes. The decision to allow re-election is perhaps the most important. By allowing politicians to run for re-election, the new reform will profoundly change the incentive structures in Mexico's political system. As it currently stands, Mexican politicians, from town mayor to federal senator, cannot seek a second term. In effect, they are lame ducks the moment they enter office, and because they never have to face voters after they start affecting policy, there is no clear mechanism for holding politicians accountable. Politicians frequently spend a significant percentage of their term reversing the changes of the prior administration. As a result of this dynamic, Mexico's political parties have evolved to be very powerful, and there is little institutional consistency between administrations.

All of these changes will take years to really have an impact. Mexico's energy sector has been in decline for decades, and implementing the bidding processes necessary to bring in substantial investment will be time-consuming. Once the investments are committed, the exploration and production process will take several years to yield significant results. However, this is a matter of extreme urgency for the Mexican government, which relies heavily on oil revenues for its national budget. Likewise, the political reforms will not change Mexico's political system overnight. However, the changes made this week address fundamental challenges that have crippled Mexico's nascent democracy. Together, these reforms will greatly strengthen Mexico as a state and economy on the global stage.

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