What Will the Proposed Telecom Overhaul Mean for Mexico?

By Daniel Castro, Ramiro Tovar Landa, Andrés Rozental, and James R. Jones
Latin America Advisor, March 25, 2013

Originally published in the Inter-American Dialogue's daily Latin America Advisor.

Q: The lower house of Mexico's Congress gave its approval Friday to a measure to overhaul the country's telecommunications industry and sent the legislation to the Senate. The reforms, proposed earlier this month by Mexican President Enrique Peña Nieto, are seen as an effort to break the dominance of billionaire Carlos Slim and broadcaster Televisa on the industry. What would the overhaul mean for the industry and for Mexico's economy in general? Will the reforms win the needed legislative approval? If Peña Nieto's telecom reform stumbles, does that mean trouble for other big reforms in the works, such as tax and energy sector reforms?

A: Daniel Castro, senior analyst at the Information Technology & Innovation Foundation: "The OECD estimates that poor performance of the telecom sector has cost the Mexican economy approximately 1.8 percent of GDP per year. Much of this has been driven by unfortunate regulatory policies that restrict foreign investments and discourage competition from new entrants. The proposed reforms would create a new independent regulator charged with ending monopolistic practices and increasing competition within the telecom sector. In addition, the current caps on foreign investment would be raised so as to encourage more investment in telecom networks. These reforms would be a positive step toward creating a telecom industry that puts the public interest ahead of (or at least on par with) private interests. Moreover, the telecom reforms would promote access to information and communication technologies, which are critical for achieving economic growth and improving productivity. But it's important to remember that increasing investment in telecom networks and encouraging competition is only part of the solution. In addition to deploying advanced networks, there is still a need to focus on demand-side policies to promote broadband adoption, such as fostering the use of innovative online services, increasing digital literacy, and ensuring affordable access to computers."

A: Ramiro Tovar Landa, senior advisor at the Brattle Group in Mexico City and economics professor at the Mexico Autonomous Institute of Technology: "The reform is a stepping stone toward the goal of universal broadband access, ambitiously making the right to broadband to a constitutional one. Such a goal would require private investment in high-speed networks across the country. However, the bill has several regulatory measures that lack a proper and sound design. For example, instead of emphasizing companies' behavior, 50 percent national market share would classify a company as dominant regardless of any other economic considerations. A new regulator, the Federal Institute of Telecommunications, would replace the current body and take over all competition enforcement from the Federal Competition Commission. The regulatory approach to dominant firms will lead to mandatory unbundling and sharing of infrastructure and be subject to regulated prices, regardless of the demonstrated effects of such a model against investment in new infrastructure. Despite the FDI opening to 100 percent with no reciprocity and only in telecommunications, the executive branch's control over awarding concessions has survived. Also, judges will no longer be able to issue injunctions after regulatory rulings. Therefore, such actions will take effect immediately, and the damage will be done if the regulatory rulings are in error. The path to greater competition is risky and is biased toward downsizing firms rather than creating incentives for investment. When wide powers are given to a regulatory agency with an ex-ante mandate about how to regulate, that body is not independent."

A: Andrés Rozental, member of the Advisor board, president of Rozental & Asociados in Mexico City and senior fellow at the Brookings Institution: "In his first 100 days in office, President Peña Nieto has successfully garnered widespread political support for various reform packages that had been pending from previous administrations. Education and labor reforms were the first to be approved by Congress and in the case of the former is now constitutionally law. The telecommunications reform package has won approval in the lower house of Congress and now must pass the Senate and be ratified by the states before becoming part of the Constitution. Rather than being specifically targeted at any individual company, the reform is designed to open the sector to competition and to guarantee Mexicans access to services that up to now have been expensive and oligopolistic in nature. Measures such as opening up national television to additional channels, wider broadband coverage and a stricter regulatory regime are all designed to fundamentally change Mexico's telecoms structure. When finally approved, these changes will greatly benefit the Mexican economy by generating competition and additional players in the sector. All indications are that this reform package will be approved, perhaps with congressional modifications. Although there has been opposition by some in the PAN to parts of the proposal, the other parties are agreed on the majority of the changes. This augurs well for further proposals that Peña Nieto plans to send to Congress in the coming months, especially the energy and fiscal reforms that are so necessary for Mexico to guarantee future growth and prosperity."

A: James R. Jones, member of the Advisor board and co-chair of Manatt Jones Global Strategies: "While the media characterizes these reforms as aimed at Telmex's Carlos Slim and Televisa's Emilio Azcárraga, the legislation is much broader than that. It is aimed at anti-competitive practices throughout Mexico's economy. Clearly, in broadcasting and telecommunications, there will be new entrants into the market. Two new national networks will be auctioned to compete with Mexico's current broadcasting duopoly. There will be substantial opportunity for foreign investment in both broadcasting and telecommunications as foreign ownership levels will be increased along with other investor protections. Such competition should substantially lower costs and provide greater choices for Mexican consumers, both businesses and individuals. The reforms also substantially strengthen the government's ability to thwart anti-competitive practices in other areas such as the beer duopoly. Establishing special courts that have expertise in competition laws and have a mandate to reach final conclusions in a timely manner will also benefit consumers and competition. In his first 100 days, President Peña Nieto has shown he is serious about pursuing major reforms that have been talked about for nearly two decades. His pact with the three major political parties gives real heft to his promises. He has been methodically putting in place the building blocks that reform labor, education, public finances and ultimately energy in Mexico. Already, the results are measurable. For example, Standard & Poor's recently upgraded Mexico's sovereign credit ratings. That tends to make investment capital less expensive and the country more competitive."

A: Rogelio Ramírez de la O, president of Ecanal in Mexico City: "The proposed telecommunications legislation is a major improvement and offers the possibility for Mexico to be more competitive and have a higher growth potential. The proposal, however, has deficiencies. One is that the new policy would be implemented by a new and stronger autonomous regulator, the Federal Institute of Telecommunications. It would be in charge of tendering, granting and withdrawing federal concessions and have the power to order the disposal of assets. Its commissioners would be proposed by the president and approved by the Senate. But one problem is that the proposal wrongly assumes this ad hoc entity would have the needed professionalism and rigor. The practical reality with most autonomous bodies in Mexico is that they fail to even reach a minimum of public respectability, given their history of subservience to the government and especially to politically strong presidents. The long-established practice with autonomous bodies is that, once the president and his party agree on the commissioners that would best represent their interests, they allow the opposition in Congress to decide on the other appointees. The outcome is an ineffective, politicized entity that is not up to its tasks, as the experiences of the Federal Electoral Institute and the Institute for Access to Information demonstrate. It would have been preferable for the government, acknowledging this reality, to  have maintained a strong institute under its own wing while committing itself to an explicit and ambitious agenda, even if only for a transition period, during which the caliber and respectability of the new institute would hopefully be established in practice. This reform has ample public support to be approved."