It’s Only Just Begun

FORBES – Enero 2014 -Luis Rubio

The first year of the government has ended and now comes the time to experience its implications and consequences. The dilemma is clear: after churning up the waters, the government’s entire incentives clamor for restoring the calm, pacifying the losers and the aggrieved and building upon what already exists. That side of the dilemma cries out for a time of peace, tranquility and the reestablishment of the partnerships affected by the legislative reform process. On the other hand, in contrast with developed countries, the legislative process is only just the beginning of the reform. In a civilized and institutionalized nation, the dispute arising from what’s proposed for reform manifests itself within the legislative context: it is there that all of the interests are at play, exert pressure, and procure taking advantage of the situation. Once the legislative process is over, everyone complies with the outcome, like it or not.

The situation is very distinct in Mexico where the end of the legislative process marks barely the beginning of the dispute. The legislators (and, in today’s arena the members of the “Pact for Mexico”) can string themselves up from the chandeliers, but in reality their acting is nothing more than abstract, operating in the stratosphere. The true battle ensues after the legislative part: on occasion on the streets, on others in the ingrained hostilities among interests that procure advancing, modifying or impeding the process of change. The reforms go into effect after this political process. The National Coordination of Education Workers (CNTE), a dissident teachers union, evidenced the case with its mobilization in the streets immediately after approval of the law and it was from that moment on that the real negotiation commenced (and the result was a radical dilution of the provision of the law). From this perspective, with the first year of government the bell was heard that signaled the end of the first round of a 15-round fight. There are still fourteen to go to see the actual result.

What’s to come will have two distinct political frameworks. On the one hand, the implementation process itself which, as illustrated by the “achievements” of the CNTE, is crucial for the proposed reforms to forge ahead or grind to a halt. Each reform entails clienteles and the individuals affected, thus the political dynamic varies (an established corporation is not the same as a pressure group). On the other hand we come upon the problematic that appears to me to be central: Will Mexico be capable of creating the climate necessary for the reforms to be successful, especially the one that the government has identified as core, the energy reform?

Everything suggests that there are two crucial components for the success of an energy reform in an environment of brutal competition, the product of the so-called “revolution” that has  taken hold of the sector, particularly in the U.S., and that implies that there are many projects with which Mexico will compete and few relevant players, i.e. a buyers market. The first component is concerned with the technical factors that the legislation should incorporate and that determine the possibility of a company’s being interested in participating in this market. These involve the possibility of booking the reserves as their own in their balance sheet and the existence of obstacles (such as local content requirements, being in partnership with Pemex or participation of the oil workers union in the new investments). In general terms, if the former is not possible and the latter comprises a condition, potential investors will not be interested.

Supposing that the technical matter is resolved satisfactorily, the remaining component has to do with the energy or hydrocarbon authority invested with the responsibility of regulating the functioning of the industry. That authority would be responsible for contracts, supervision, and administration of oil reserves and, in general, regulation of the hydrocarbon market. The countries that are successful in this matter are those that have achieved the consolidation of a strong and autonomous regulatory authority, one that is independent and with such autonomy that it enjoys the trust of the investors. The constitutional reform did not create such a strong, independent regulator.

This latter is a real problem. If one observes the rest of the economy and the society, Mexicans have been practically incapable of consolidating an institutional system of checks and balances, one likely to achieve that crucial autonomy. Mexicans often speak with pride of institutions such as the Federal Electoral Institute (IFE), the Federal Competition Commission (CFC), the Federal Institute for Access to Information (IFAI) or the Federal Telecommunications Commission (Cofetel), but the reality is that every time one of these does something that upsets the politicians, their board is dismantled and the source of the trouble is eliminated (and this happened in almost all of these instances in 2013). That is, autonomy only lasts until it’s exercised for real. How, within this context, can one suppose that it will be possible to reach this in energy?

There is a reason for optimism: up until the nineties, political parties invested more of their funds in post-electoral processes than in the campaign itself because the latter is where the negotiations took place. Today that’s no longer true: elections are duly supervised and the results respected. The advance has been real. The same can happen with energy, but it won’t be easy.