Last week, Mexican President Enrique Peña Nieto unveiled his long-awaited energy reform plan that many hoped would overcome the historic barrier to private and foreign investment to maximize his country’s oil wealth. Unfortunately, his initial proposal suggests he may not be willing to invest the political capital needed to unlock the potential of Mexico’s energy sector.
Peña Nieto appears to have played it safe to avoid a confrontation with Mexico’s powerful left or the base of his Institutional Revolutionary Party (PRI). The president may also have acted cautiously in order to preserve the Pact for Mexico – a multiparty accord that has already facilitated education and telecommunication reforms and has other consensus items remaining on its agenda.
The language within the reform is also notoriously nationalistic and echoes many of the ideas of former president Lazaro Cardenas (who expropriated the energy sector in 1938), in an obvious bid to placate the left in Mexico. This language harkens back to the resource nationalism that spawned the inefficient energy monopolies that have stunted the growth of the energy sector in Latin America.
The focal points of the needed energy reforms are the state-run oil company, Pemex, and the Federal Electricity Commission (CFE), in light of their precarious financial situations and the need for private capital to expand their production and infrastructure. However, Peña Nieto’s published plan is long on rhetoric but short on details.
For example, he claims that his reform will “correct Pemex’s fiscal regime to make it competitive,” “improve transparency and accountability,” and “establish a national policy to promote purchases of domestic suppliers in the hydrocarbon sector.” Although these are certainly essential pillars, his plan lacks the sort of specificity that will be required to initiate a meaningful public discussion or generate momentum behind the reform package.
For example, the president’s plan maintains that Pemex will retain ownership of petroleum resources, but it fails to establish a clear framework for private investment. It does not state what sort of contracts the government will grant to private investors or define the degree to which private capital will be allowed to enter the energy sector. Unlike the recently passed telecommunications reform, there is no mention of allowable percentages that private stakeholders may undertake in Pemex projects – which is an essential part of any reform designed to attract private capital.
Also, the reform plan states that “there is a possibility of establishing contracts for exploration and exploitation with other entities,” but the language does not offer guidelines as to how these contracts will operate. In this regard, Senator Fernando Yunes of the center-right opposition National Action Party (PAN) noted that, “The government’s initiative is incomplete because it only speaks of partnerships for shared utilities. We are opening [in our own proposal] the possibility of joint ventures, concessions and transfers of rights in order to attract more investment and generate greater economic benefit to our country.”
Transparency and accountability should also be paramount in this reform. However, there is no mention of limiting the dominant role of the oil worker’s union in managing Pemex. Nor are there any specific measures requiring transparency on how Pemex conducts its business.
The reform now goes to the Mexican Congress, which must produce the “secondary legislation” after a thorough parliamentary debate among the diverse representatives. The radical left and the Party of the Democratic Revolution (PRD) already have expressed disapproval of any sort of reform in the energy sector. On the other hand, the conservative PAN already has categorized the initial blueprint as “weak,” “myopic,” and “marginal,” suggesting that its legislators will seek to make constructive changes.
The president obviously hopes the PAN bloc will pick up where his proposal left off and do most of the heavy political lifting by offering amendments to the legislation that will flesh out reforms. In order for the package to receive approval in Mexico’s bicameral federal legislature, the PAN and the free-market wing of the ruling PRI will have to commit extraordinary political capital. The amendments that the opposition may bring to the table will determine if the reform will be transcendent or another failed attempt at saving the waning energy sector in Mexico.
Leftist radical Andres Manuel Lopez Obrador, who narrowly lost the presidency in 2006, has threatened massive public demonstrations against the reform. Time will tell if Peña Nieto will muster the courage to get behind the legislation and constitutional reforms to build an energy sector that will serve Mexico’s long-term interests.