By Dwight Dyer
MEXICO CITY – The passage of President Enrique Peña Nieto’s reform agenda last year was a watershed moment for Mexico’s government, representing the most significant change to the country’s governance since the election of Vicente
Some of those details are now coming into focus for two of the most significant areas of reform: telecommunications and energy. The secondary legislation governing telecoms reform was signed into law on July 14, and legislation implementing the energy reforms is not far behind.
Initial reaction to the telecoms laws was mixed. On the one hand, critics charge that the new laws do not go far enough to encourage competition. Under the new system, government regulators can only block acquisitions or takeovers that would put more than half the market share in control of a single company. Skeptics suggest the result will be a duopoly: a market dominated by two powerful companies, each controlling just under half the market.
Proponents of the telecom reform point to its immediate benefits. Costs for some services, like mobile phone roaming, have already gone down. Access to other services has improved, for instance, restricted TV subscribers now have access to open air broadcast channels. Whether services improve in the long term remains an open question.
In many respects the telecoms reforms are a warm up to the much more eagerly anticipated energy reforms, which promise to open Mexico’s potentially lucrative oil and gas reserves to foreign investment for the first time in decades. The energy legislation is currently under debate in Mexico’s Senate, but already some basic contours have emerged.
One of the more controversial topics under debate is the potential for a provision allowing the Mexican government to expropriate privately owned land for oil and gas exploration. The language of that provision appears to have softened to make such appropriations temporary and ensure profit sharing with land owners, though the limits of any such provision are sure to be tested in the courts.
Another detail to emerge from the negotiations is an apparent agreement to restrict foreign investment in midstream activities. Foreign investment in overland distribution appears likely to be blocked, and foreign companies will be limited in the degree to which they can supply fuel to ships, airplanes and railroads. Such protections would make midstream activities more lucrative for Mexican companies. There will be no restrictions to foreign investment in pipelines, however, which will likely spur a considerable expansion of the country’s pipeline infrastructure.
In a particularly positive sign, the proposed legislation contains checks and balances that will limit the president’s ability to manipulate the management of state-owned energy companies. Any nominations or dismissals to those companies’ executive boards will need to be approved by a two-thirds vote in the Senate. Indeed, greater transparency and insulation from political interference may be the most important effects of the reforms in both the telecom and energy sectors. Intense competition and widespread foreign investment seem less likely in the short-to-medium term, but even so, clarity on the exact contours of the reforms is likely to bolster investors in both sectors.
Dwight Dyer is a senior analyst at Control Risks, the global risk consultancy. For more analysis, sign up for a free trial of our Country Risk Forecast.
