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Mar 15, 2013 | 10:44 GMT

5 mins read

Mexico: A Telling Reform Package

Mexico: A Telling Reform Package
Ronaldo Schemidt/AFP/GettyImages
Summary

A telecommunications reform measure soon to be voted on by Mexico's Chamber of Deputies sets up an important regulatory shift that would help the country improve its growth prospects and attract foreign investment over the long run. The political consensus already achieved in the lead up to the vote by Mexican President Enrique Pena Nieto's administration demonstrates political unity in the wake of the July elections and indicates that major political counterpoints have been assuaged.

The reform, as the first constitutional adjustment of Pena Nieto's administration, could also be a test of the viability of significant constitutional change for other critical reforms, including changes in the energy sector. Mexico is a critical player in North America and is gaining importance globally. How it handles these reforms will impact politics and economics for decades.

The Mexican Chamber of Deputies will vote in the next week or so on a measure that would liberalize competition in the telecommunications and broadcasting sectors. If ultimately passed into law, it would mark the most substantial reform to the telecommunications industry since a 1995 reform that opened up the industry to private investment for the first time. Although attempts have been undertaken to change the 1995 law, including adjustments as recently as January 2013, the sector has lacked a comprehensive overhaul.

The new reform would change at least six articles in the Mexican Constitution in an effort to strengthen competition, empower regulatory agencies in the telecommunications industry and make guaranteed access to information a right for Mexicans. The measure has received significant, unified support from major and minor parties in the Mexican legislature. The constitutional changes recommended will need to receive support from two-thirds of federal lawmakers and a majority of the country's state legislatures.

If implemented according to the spirit of Pena Nieto's recommendations, the new law would enhance competitiveness throughout the telecommunications and broadcasting sectors and attract foreign investment. In the telecommunications industry, foreign companies would be able to own 100 percent of Mexican operations, up from the 49 percent allowed under the current law. In broadcasting, foreign companies would be able to own 49 percent, up from zero percent. Additionally, the law would create two public channels and permit greater competition among Mexican companies for rights to broadcast within the country — an issue that has been politically volatile in recent years.

Tackling Giants

Telecommunications and broadcasting are dominated by a handful of companies, and liberalizing the market likely would contribute to higher growth and support Mexico's overall economic plan. In communications, the market is dominated by America Movil, which through its subsidiaries Telmex and Telcel dominates 80 percent of fixed line communications and 70 percent of the mobile market. America Movil is owned by Mexican business mogul Carlos Slim, who got into the industry when it was privatized in 1995. A January 2012 study sponsored by the Mexican government and carried out by the Organization for Economic Cooperation and Development estimated that the dominance of a single operator in the Mexican telecommunications market entailed an opportunity cost worth 2 percent of Mexico's gross domestic product. 

If accurate, the report's findings indicate that liberalization could contribute significantly to higher overall annual growth as new providers invest in infrastructure and attract customers. Moreover, telecommunications infrastructure is the foundation for other economic activities, and improved networks would spur growth in other industries. As Mexico attempts to attract significant investment from abroad to encourage growth, a flexible, more extensive telecommunications structure would be a boon for new companies coming in, particularly if increased competition drives down prices.

The liberalization could negatively affect America Movil and Slim directly. The new regulations stipulate that dominant players could be forced to divest themselves in areas where they control more than 50 percent of the market. This could also force media giant Televisa to sell off assets to reduce its 60 percent hold on the broadcasting market.

By targeting communications and broadcasting at the same time, however, the government reforms would open up new opportunities for Slim. He has attempted for years to invest in television broadcasting but had been unable to do so as a result of a legal and public relations battles with Televisa and the slightly smaller TV Azteca. These two companies dominate the television broadcasting market and have used a range of legal tactics to prevent Slim from entering. The decision to reform both industries simultaneously was therefore likely a political compromise required for the law to move forward with sufficient political support.

More Changes to Come

Overhauling Mexico's telecommunications law would be a major political win for Pena Nieto, whose election in July 2012 led to a flood of legal changes. The rapidity with which the Mexican system went from political deadlock ahead of the elections to smooth cooperation among major parties highlights the degree of consensus among Mexican policymakers regarding the changes needed to achieve the government's economic and social goals. 

Mexico will face its own fiscal cliff in the years to come, because its heretofore most reliable source of government funds, the oil industry, can be expected to provide significantly less revenue in the future. Around a third of Mexico's government revenue comes from state-owned oil company Petroleos Mexicanos, commonly known as Pemex. Due in part to high taxes and fees levied on Pemex, the company has been unable to maintain the levels of exploration and production needed to keep reserves and oil output growing. As a result, Pemex operated at a net financial loss of 33.9 billion pesos ($2.7 billion) in 2012, down from a positive financial standing of 48.2 billion pesos in 2004.

The government cannot significantly reduce its already low public spending and thus must find an alternative source of revenue. Tax reform will be a key part of that effort. These reforms will be extremely sensitive politically; Mexico's inefficient connection mechanisms make a value added tax the most logistically feasible option, but this tax would disproportionately affect Mexico's poor. Such changes will likely require an unpopular constitutional amendment. So, too, may energy reform.

Enshrined in Mexico's constitution is the promise that subterranean minerals are the sole property of Mexicans, and the legal classification makes it difficult (to date, it has been impossible) for Mexico to sign industry standard joint venture agreements allowing foreign companies to claim proven and estimated reserves as assets. The Pena Nieto administration has made it clear that it will not privatize reserves. The government may need to make some constitutional changes to enact whatever compromise investment scheme it thinks it can feasibly negotiate while creating conditions for investment. 

The telecommunications reform could pave the way politically for the constitutional changes required by the biggest reform questions facing the Pena Nieto administration. Success with the telecommunications reform appears to have been guaranteed through backroom deals that allowed easy approval by the lower house. Even if the measure is changed in the Mexican Senate, the upper house is likely to pass it eventually. If the legislation experiences a similarly smooth approval process in the state legislatures, upcoming changes are not likely to face insurmountable resistance.

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