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Mexico’s Structural Reform Agenda
HE Juan José Gómez Camacho, Embassador of Mexico
WEIF 2014
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Addressing Political Constraints: Achieving Broad Consensus and Support.
“Pacto por México”
• Political agreement negotiated and signed by representatives of the three main political parties in Mexico on December 2nd, 2012, just one day after President Enrique Peña Nieto assumed office.
• It creates a consensus that transcends political differences to enable Congress to pass the reforms necessary to promote democracy and economic growth, as well as to reduce poverty and social inequality.
• Agreements for: a society of rights and liberties; economic growth, employment and competition; security and justice; transparency, accountability and anti-corruption; and democratic governance.
• 11 structural reforms have been carried out in the 20 months following the agreement, which required 58 constitutional changes, amendments to 81 laws, the creation of 21 new laws and the abolishment of 15.
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Structural Reform Agenda: 11 Reforms in less than 2 years
Six Reforms to increase productivity in all sectors and regions:
1. Labor Reform2. Anti-trust and Competition Reform3. Fiscal and Social Security Reform4. Financial Reform5. Telecommunications Reform6. Energy Reform
Three Reforms to strengthen and expand the rights of Mexican citizens:
7. Education Reform8. New Law of “Amparo” (legal injunction or constitutional challenge)9. Issuance of a National Code of Criminal Procedures
Two Reforms to reinforce democracy and freedoms:
10. Political-Electoral Reform11. Transparency Reform
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A need for Reform: Challenges in productivity, education, justice, democracy and transparency required effective and efficient structural transformations.
• Over the past three decades Mexico has transitioned successfully to an electoral democracy and has opened its economy, creating competitive industries.
• However, economic growth had remained below its potential largely due to the fall in productivity.
• Despite the increase in social spending, levels of poverty and inequality failed to decrease. Education in the country had made progress in coverage, but lagged behind in quality. The possibility of reaching a prompt and effective justice was hampered by conflicting criteria as well as by long, complex and opaque processes.
• Our democracy did not give substantive results due to polarization and certain rules that hindered fostering agreements. Transparency levels of government and institutions were insufficient.
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Reforms to increase productivity in all sectors and regions.
1. Labor Reform
• Encourages the creation of jobs, establishes improved working conditions and stimulates formal employment.
• Improves market flexibility through new forms of labor market entry, such as contracts for testing and initial training. The practice of subcontracting (outsourcing) is regulated.
• Provides greater protection to workers in cases of harassment and disability, amongst others.
2. Anti-trust and Competition Reform
• Fosters competition and investment across the board, promoting more competitive prices, as well as the adoption of new technologies.
• Updates relevant legislation and strengthens the regulatory agency. • Prevents unhealthy market concentrations.• Increased competition should result in cheaper inputs for SMEs
Tax
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6
Reforms to increase productivity in all sectors and regions.
3. Financial Reform• Fosters better and cheaper credit by increasing competition, redefining the Development
Bank’s mandate and strengthening the rule of law.• Offers necessary information for better decision-making of both financial institutions and
consumers. • Updates the regulatory framework to maintain a solid and responsible financial system.
4. Fiscal Reform• Increases fair tax levying to meet priorities such as education, social security and
infrastructure needs. • Encourages formality and maintains tax burden on companies lower than that prevailing in
the majority of OECD countries.
Source: OCDE. * Includes the average corporate tax charged by local governments.
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7
Reforms to increase productivity in all sectors and regions.
5. Telecommunications Reform
• Opens the telecommunications sector to 100% foreign direct investment in all telecommunications and to 49% in broadcasting.
• A new institutional design was adopted: • The Federal Telecommunications Institute (IFT) was created as an autonomous body
responsible for regulating the spectrum, networks, services and competition in telecommunications and broadcasting, and
• Specialized courts to resolve conflicts were established.
• Promotes effective competition by regulating market concentration, controlling essential inputs, addressing anti-competitive practices, and establishing asymmetric regulation to prevailing economic agents.
• Establishes a goal that at least 70% of all households and 85% of SMEs nationwide, are provided with access to broadband speeds and competitive prices by 2018.
• Eliminates convergent regulatory barriers and allows concessionaires to provide all services under a single concession scheme.
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Reforms to increase productivity in all sectors and regions.
6. Energy Reform
• A deeply needed and historic constitutional energy reform was approved in Mexico in December 2013. The secondary legislation was enacted by President Peña Nieto last Monday.
• The Energy Reform will guarantee the supply of a vast array of energy-related
products at competitive prices, including oil, electricity and natural gas. At the same time, it will modernize the sector to trigger investment, economic growth and job creation.
• This is the most significant overhaul of the energy sector in the country in more than 70 years.
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Reforms to strengthen and expand the rights of Mexican citizens.
7. The Education Reform created a Professional Teaching Service to ensure that income, promotion, recognition and retention of teachers is based on merit. Also a National Educational Assessment System, a mechanism for continuous improvement for the benefit of students, was created.
8. The New Law of “Amparo” (legal injunction or constitutional challenge) expands the sphere of protection to citizens, which now includes human rights protected by international treaties. It simplifies and streamlines existing procedures.
9. Issuance of a National Code of Criminal Procedure, which has generated a unified criminal justice model, guaranteeing better coordinated and more homogeneous procedures for all.
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Reforms to reinforce democracy and freedoms.
10. The Political-Electoral Reform consolidates a results-based democracy by promoting greater collaboration between the executive branch and the legislature, encouraging citizen participation and providing greater certainty, fairness and transparency of elections.
11. Transparency Reform strengthens the right of access to public information, facilitates the evaluation of the work of public servants by citizenship and promotes accountability.
11
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
100
150
200
250
Total Factor Productivity in MexicoIndex, 1950=100
Source: World Bank.
GDP Growth and ProductivityAnnual growth rate, 1981-2011
Source: INEGI.
Chile Ireland Korea Mexico-1
0
1
2
3
4
5
6
7
4.94.2
6.2
2.4
1.1
1.92.4
-0.7
GDP Growth Productivity%
The economy’s long run growth potential has been hindered by low levels of productivity.
Energy Reform: why was it necessary?
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1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Ind
2003
2004
2005
2006
2007
2008
2009
2010
2011
85
90
95
100
105
PTF bienes comerciables sin petróleo y gas natural
PTF bienes no comerciables más petróleo y gas natural
Source: SHCP calculations with INEGI data using KLEMS methodology.
Tradables w/o oil & gas
Non tradables plus oil & gas
Entry of China into the WTO
Total Factor Productivity in the Tradable and Non-Tradable Sectors Index 1990=100
Energy Reform: why was it necessary?
Since Mexico entered NAFTA (1994), productivity growth in the tradables sector has been significantly greater than that of the non-tradables sector, including oil and gas
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Energy Reform: why was it necessary?
Decreasing production despite rising investment in the past decade.
*/ 2014 data: January-May average for production. Investment approved in the Federal Budget. Source: PEMEX´s institutional Database.
Oil production and investment on exploration and productionThousands of barrels a day (tbd), USD Bn
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
*
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
3,600
0
5
10
15
20
25
30
3,022
3,383
2,5222,488
3.1
10.0
22.523.9
Oil Production Investment in Exploration and Productiontbd
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• Despite being in an energy rich country, Pemex did not always have the sufficient technical, financial and administrative capacities to extract by itself non-conventional hydrocarbons, which will be the main source of oil production in the future.
• Previously, Pemex was legally bound to carry out, on its own, all the activities related to the oil industry, regardless of any financial, operational or technological limitations. Under these conditions, Pemex naturally concentrated on the more profitable business: the exploration and production of oil.
• Hence, national production of other energy products underperformed.
Energy Reform: why was it necessary?
Imports as % of national consumption
1997 2012
Natural Gas imports 3% 29%
Gasoline imports 25% 45%
Petrochemical imports 41% 75%
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Energy Reform: why was it necessary?
• Electricity prices are high and non competitive.
• Average electricity tariffs (which are heavily subsidized) are 25% more expensive, on average, than the prevailing ones in the United States.
• Without the subsidy, electricity tariffs would be 73% more expensive than in the US.
• Important limitations hinder electricity generation, transmission and distribution.
• Lack of sufficient natural gas results in higher generation costs.
• The operator of the National Electricity Grid lacked independence (it was part of the National Electricity Utility).
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Oil and gas…
• Reaffirms the national ownership of hydrocarbons and the State's role in the energy industry.
• A new scheme for public and private investment in exploration and extraction of hydrocarbons is established, through which the Federal Government may:
• Assign to Pemex current production fields and additional exploration areas to be developed where Pemex demonstrates to have the technical, financial and administrative capacities to develop them in an efficient and competitive manner (Round Zero).• Pemex could exploit these fields alone or in association with third parties.
• Assign contracts to Pemex or private companies through a competitive bidding process. The contracts will be awarded to the participant that offers the most favorable economic conditions for the State.
• Strengthens the energy sector governance by creating new bodies: Mexican Petroleum Fund for Stabilization and Development (MPFSD*), the National Agency for Industrial Security and Environmental Protection of the Hydrocarbon Sector (NAISEPHS) and the National Center for Control of Natural Gas.
Energy Reform: Main elements.
* Public trust-fund responsible for administering oil revenues in order to strengthen public finances with a long term view, under a responsible and transparent management structure.
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Oil and gas
• A new institutional arrangement is created, incorporating a system of checks and balances amongst the Ministry of Energy, the Ministry of Finance, the MPFSD, and the NAISEPHS.• This scheme will guarantee that contracts maximize the benefits for the country in a
substantive and transparent manner.
• Establishes new mechanisms for transparency, accountability, and anti-corruption.
• Allows private participation in refining and natural gas processing and petrochemical activities. Also, private participation is allowed in storage, transportation and distribution of oil, gas and their derivatives, through a permit granted by the Energy Regulatory Comission (CRE).• Open access rules will apply for available capacity in storage, transportation and
distribution infrastructure.
• Private participation in storage, transportation, distribution and retail sale of gasoline and diesel is allowed.
• Promotes energy sustainability and environmental protection.
Energy Reform: Main elements.
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Electricity
• Electricity generation and commercialization is now fully opened to private participation.
• The public service of electricity will be provided by the Federal Electricity Company (CFE), and contracts between CFE and private companies will be allowed for the financing, installation, operation, expansion and/or maintenance of transmission and distribution infrastructure.
• The National Center for Energy Control (CENACE) will become an independent administrator of the grid and operator of a wholesale electricity market. It will also be responsible for planning the expansion of the transmission network.
• Private investment is allowed in the exploitation of geothermal resources through PPPs with CFE.
• A Universal Electric Service Fund is created to finance electrification in rural communities. The executive holds the power to set tariffs for certain consumer support, (eg for domestic consumers or cities in extremely warm areas).
• Clean Energy Certificates will be used by market participants to comply with clean energy generation goals, established each year by the Ministry of Energy.
Energy Reform: Main elements.
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A flexible contractual framework with standard, well-known-by-industry models was established to enable better use of Mexico´s resources in order to maximize revenue for the Nation:
Service: Fixed or variable payment. Profit sharing: % of profits as payment. Production sharing: % of production as payment. License: transmission of hydrocarbons once they have been extracted from the
subsoil A combination thereof.
The approved reform allows companies to report, for accounting and financial purposes, the expected benefits of signed contracts, as long as it is clearly stated on those contracts (including licenses) that all solid, liquid or gaseous hydrocarbons in the subsoil are Mexico’s property.
Energy Reform: New contractual framework for oil and gas exploration and production
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Investment Opportunities: Oil and Gas Sector
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Investment Opportunities: Electricity Sector
A wholesale market operated by CENACE will be established, in which participants (generators, traders, suppliers and qualified users) may sell and buy electricity and ancillary services, including via importation or exportation, “transmission financial rights” and “clean energy certificates”.
Private parties may:
• Generate electricity.• Trade electricity.• Enter into agreements related to transmission and distribution activities, and
construction and expansion of the grid, amongst others, with CFE.
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Expected benefits from the Energy Reform
Additional 1% of economic growth by 2018 and 2% by 2025.
12.6 billion dollars in FDI yearly
500,000 additional jobs by 2018 and 2.5 million by 2025.
Decreased cost of energy products, which will translate into price reductions to consumers.
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1. "Round Zero“: PEMEX was granted current areas of exploration and production equivalent to 20.589 billion oil equivalent barrels (boeb) and prospective areas amounting to 22.126 (boeb) (all together, they amount to 20.5 years of production). – (Announced yesterday, just 2 days after secondary legislation was enacted)
2. "Round One“: 169 blocks (109 for exploration and 60 for extraction) will be open to domestic and foreign investors through a public bidding process. This is expected to yield an average investment per year (2015-2018) of 12.6 billion USD, of which 8.5 billion will be obtained through association schemes with Pemex and 4.1 billion through bidding contracts during 2015. – (Announced yesterday, just 2 days after secondary legislation was enacted)
3. Issue the decrees creating the national centers for the Control of Energy and Natural Gas, as well as the decentralized agencies in August.
4. Submit in August to the Senate the nominations of candidates to be appointed to the new national commissions of Hydrocarbons, the Energy Regulatory Commission, as well as the candidates who will serve as independent board members of PEMEX and CFE.
Energy Reform: Next Steps
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5. Create the Mexican Petroleum Fund for Stabilization and Development in September.
6. Present the strategic training program for human resources in hydrocarbons in September.
7. Publish all legislation and regulations related to the Energy Reform by October.
8. Present the decree for the modernization of the Mexican Oil Institute in November.
9. Publish the guidelines for the issuance of certificates of clean energy in November.
10. Establish the National Agency of Industrial Safety and Environmental Protection in the Hydrocarbon Sector in November.
Energy Reform: Next Steps
Given the reform agenda to increase productivity, the strong macro fundamentals, promising demographics and increased competitiveness, Mexico will significantly increase its potential growth.
25
Unit Labor CostsIndex, 2005=100
Source: OECD.
200
200
200
200
200
200
200
200
200
200
201
201
201
201
201
201
90
100
110
120
130
140
150
160
Mexico China BrazilIndex2005=10
0
Working Age PopulationIndex, 1990=100
Source: United Nations Population Division.
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
60
80
100
120
140
160
180
200
220
Brazil Chile ChinaMexico Peru
2014
2026
2033
2042
2048
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The reform agenda will significantly increase Mexico’s potential to achieve faster growth and more inclusive development.
• Combined, the 11 deep structural reforms may increase Mexico’s growth potential to about 5% of GDP or more.
• Formal employment could be increased to 1 million jobs annually.
• The legal framework and new institutional arrangements are in place. The focus now will be on achieving an effective implementation of the structural reforms.
Mexico’s Structural Reform Agenda
WEIF 2014
