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«
OECD Reviews of Regulatory Reform
OECD Reviews of Regulatory Reform
MEXICO
PROGRESS IN IMPLEMENTING REGULATORY REFORM
MEXICO
Mexico has made significant progress implementing reforms since the first Review of Regulatory Reform in Mexico,
published in 1999. A comprehensive regulatory programme at the federal level has accompanied the economic
transition of recent years. Political leadership and co-operation between political actors and private stakeholders have
been key elements for reform. Regulatory policy has also been part of a market openness strategy, fostering free trade
and attracting investment.
PROGRESS IN IMPLEMENTING
REGULATORY REFORM
This publication identifies the lessons learned from the implementation process. The monitoring exercise covers
the core issues of government capacity for regulatory quality and market openness. Comprehensive chapters on
regulatory authorities and the electricity sector, fundamental for Mexico’s economic and social development, complete
the analysis.
Since the end of the 1990s, Mexico has used regulatory policy to increase the flexibility and competitiveness of the
economy in the midst of a political transition. The goal was to improve the regulatory environment for domestic and
foreign businesses. However, further progress on regulatory reform can help Mexico enhance its potential growth.
Sectoral aspects deserve further attention, in order to lift long-term economic prospects.
OECD's books, periodicals and statistical databases are now available via www.SourceOECD.org, our online library.
This book is available to subscribers to the following SourceOECD theme:
Governance
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ISBN 92-64-01750-X
42 2004 11 1 P
-:HSTCQE=UV\ZUY:
OECD Reviews of Regulatory Reform – Mexico
Regulatory quality can be strengthened by the extension of regulatory policy to sub-federal levels of government, a
clearer hierarchy of regulations, and more effective compliance and enforcement mechanisms. Regulatory authorities
require a modern regulatory framework which ensures that independence is balanced with accountability. The
electricity sector needs important changes: a stronger regulator, the introduction of competition principles, and a
transparent system for tariffs and subsidies. This report shows how regulatory policy, as a dynamic process aimed at
improving regulatory tools and institutions, can make a difference. A whole-of-government approach can positively
contribute to deepen structural reforms needed to promote private investment and to boost the productivity and
competitiveness of Mexico.
OECD Reviews of Regulatory Reform
Mexico
Progress in Implementing Regulatory Reform
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came
into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD)
shall promote policies designed:
– to achieve the highest sustainable economic growth and employment and a rising standard of
living in member countries, while maintaining financial stability, and thus to contribute to the
development of the world economy;
– to contribute to sound economic expansion in member as well as non-member countries in the
process of economic development; and
– to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in
accordance with international obligations.
The original member countries of the OECD are Austria, Belgium, Canada, Denmark, France,
Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries
became members subsequently through accession at the dates indicated hereafter: Japan
(28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973),
Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland
(22nd November 1996), Korea (12th December 1996) and the Slovak Republic (14th December 2000). The
Commission of the European Communities takes part in the work of the OECD (Article 13 of the
OECD Convention).
Publié en français sous le titre :
Examens de l’OCDE de la réforme de la réglementation
Mexique
Progrès dans la mise en œuvre de la réforme de la réglementation
© OECD 2004
Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre français
d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, tel. (33-1) 44 07 47 70, fax (33-1) 46 34 67 19, for every country except
the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400,
222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: www.copyright.com. All other applications for permission to reproduce or translate all or part
of this book should be made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France.
FOREWORD
Foreword
P
rogress in implementing regulatory reform in Mexico is the subject of the first in a series of
monitoring exercises carried out under the OECD Regulatory Reform Programme. At their first
meeting on 27-28 March 2003, delegates to the Special Group on Regulatory Policy (SGRP) approved
an activity to monitor the implementation of policy recommendations of the country reviews carried
out under the Regulatory Reform Programme since 1998. Mexico and Japan are the first countries to
initiate such an assessment.
The 20 country reviews completed between 1998 and 2004 include more than 1 000 specific policy
recommendations and approximately 120 chapters each focussing on regulatory reforms in selected
areas. Taken as a whole, the reviews demonstrate that a well-structured and implemented programme
of regulatory reform contributes to better economic performance and enhanced social welfare. Economic
growth, job creation, innovation, investment, and new industries benefit from regulatory reform, which
also helps to lower prices and to create more choices for consumers. Linkages among competition,
market openness and regulatory policies are mutually reinforcing. Comprehensive regulatory reforms
produce results more quickly than piece-meal approaches; and they help countries to adjust more
quickly and easily to changing circumstances and external shocks. At the same time, a balanced
approach needs to take social concerns into account. An effort must be made however to pursue
medium-term goals in the face of short-term obstacles. Sustained and consistent political leadership is
an essential element of successful reform. A monitoring exercise can help renew an action plan, and
drawing on useful practices from other countries, can inform public dialogue on the benefits of reform.
The monitoring exercise offers insights on the follow-up of the suggested policy options within a
country’s economic and institutional context, providing an opportunity to benchmark status, progress
and further challenges on the domestic reform agenda. The pressures for reform often respond to a
crisis or shock. Although the circumstances leading to a decision to give regulatory reform higher
priority will vary from country to country, experience shows that governance systems should be more
flexible and adaptive. The monitoring exercise also contributes to a better understanding of the
problems facing all countries when implementing policies to improve the quality of regulation and the
regulatory environment, including when and how to introduce new units, the process of building
constituencies and communicating the results of reform, the use of regulatory impact analysis, and
other techniques to achieve a “whole of government” approach.
Each report consists of an assessment of the progress made to implement the recommendations of
past reviews, complemented by ongoing cross-country analytical work of best practices and regulatory
performance. The report on Mexico includes country-specific assessments of progress in the areas
covered by the thematic studies in the 1999 review: regulatory performance (macroeconomic context,
strengths, successes and main results of regulatory reform); regulatory governance (tool, institutions
and management structures to promote regulatory quality); and market openness. A separate follow
up was made for competition law and policy. Two new chapters on regulatory authorities and the
electricity sector complete the current work. The exercise is supported by a self-assessment based on a
questionnaire completed by the country, and mission of a Secretariat team to collect further information
and to discuss with policy makers. The report, including options and recommendations based on the
success achieved to date and on Mexico’s current context and challenges was presented to and
discussed by the SGRP on 14 June 2004.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
3
FOREWORD
Acknowledgements. The horizontal Programme on Regulatory Reform is
headed by the OECD Deputy Secretary-General Richard Hecklinger. The country
reviews and monitoring exercise are co-ordinated by the Directorate for Public
Governance and Territorial Development.
The monitoring exercise of Mexico reflects contributions from the government of Mexico,
the Working Party on Regulatory Management and Reform of the Public Governance
Committee, the Working Party of the Trade Committee, and representatives of member
governments.
In the OECD Secretariat, Odile Sallard, Rolf Alter, Josef Konvitz, Stéphane Jacobzone,
Delia Rodrigo, Bénédicte Larre, Evdokia Moïsé, Oliver Solano, and Roberto Francia
contributed substantially to the monitoring exercise of Mexico, together with
Caroline Varley, consultant to the OECD and the IEA, who prepared the chapter on
electricity. The documentation was prepared by Jennifer Stein.
4
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
TABLE OF CONTENTS
Table of Contents
Chapter 1.
Mexico Monitoring Exercise: Synthesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Progress made in regulatory reform since the 1999 review . . . . . . . . . . . . . . . . . . . . .
Lessons from implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Further challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Challenges and options for the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
17
23
27
30
34
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
Chapter 2.
Government Capacity to Assure High Quality Regulation . . . . . . . . . . . . . .
37
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory tools and procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
39
44
49
59
62
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67
Chapter 3.
Market Openness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transparency and openness of decision making . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
70
Non-discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Measures to avoid unnecessary trade restrictiveness . . . . . . . . . . . . . . . . . . . . . . . . .
Reducing the costs of regulatory diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Application of competition principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusions and policy options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74
76
81
83
85
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86
Chapter 4.
Regulatory Agencies in Mexico: the Case of Energy, Water,
Financial Services and Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . .
89
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Designing independent regulators, a common challenge . . . . . . . . . . . . . . . . . . . . . . 91
Recent trends and the pressure for change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Current trends and challenges in the financial, water, energy
and telecommunication sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
The financial sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
The water sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
5
TABLE OF CONTENTS
The telecommunications sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The energy sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment of policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independence and accountability of regulatory authorities . . . . . . . . . . . . . . . . . . .
The Mexican system: the need of a proper framework for regulatory agencies. . . .
An international perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building a pathway towards trust and independence . . . . . . . . . . . . . . . . . . . . . . . . .
Balancing independence with accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securing proper material conditions for independence. . . . . . . . . . . . . . . . . . . . . . . .
Assessment of policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Horizontal design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Horizontal design issues, by function or sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The coordination with other agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Powers for high quality regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The powers of the Mexican regulatory authorities, a domestic
and an international perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adapting the distribution of specific powers in relation to the institutional
environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximising the quality of the regulatory power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment of policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessing the performance of regulatory authorities . . . . . . . . . . . . . . . . . . . . . . . .
Towards outcome-oriented performance assessment . . . . . . . . . . . . . . . . . . . . . . . . .
The current practice in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assessment of policy implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion and recommendations for action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108
112
113
114
114
115
116
117
124
127
128
128
132
135
136
139
140
143
144
144
146
147
148
148
150
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Chapter 5.
Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
History and general context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Main features of the electricity sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The current legal, regulatory and governance framework. . . . . . . . . . . . . . . . . . . . . .
Electricity performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proposed reforms and their assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Natural gas market reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other important issues on the path to reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A transitional option for reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy options for consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
164
165
167
172
179
187
200
203
205
207
209
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
6
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
TABLE OF CONTENTS
Annexes
A. Implementation of the 1999 Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. General Description of the Four Mexican Regulatory Agencies,
as of February 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Recommendations from Past OECD Reviews. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Independence and Financing of the Four Mexican Agencies . . . . . . . . . . . . . . . . . .
E. Independence and Financing of the CFC and the IFAI . . . . . . . . . . . . . . . . . . . . . . . .
F. Independence of Regulatory Institutions: the Case of Telecommunications . . . . .
G. Independent Regulatory Agencies in the Electricity Supply Industry (ESI) . . . . . . .
H. Independence of Banking Supervisors, Selected OECD
and Latin American Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I. Possibility of Appeals after Decisions Led or Instructed by Selected Regulatory
Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J. Figure on the Circuit for Appeals and Judicial Review . . . . . . . . . . . . . . . . . . . . . . . .
K. Objectives and Powers of the Mexican Regulatory Agencies. . . . . . . . . . . . . . . . . . .
L. Telecommunication Regulators: Regulations on Universal Services . . . . . . . . . . . .
219
221
222
227
228
229
231
233
238
239
240
241
Boxes
2.1.
4.1.
4.2.
4.3.
4.4.
4.5.
5.1.
5.2.
5.3.
5.4.
5.5.
5.6.
5.7.
5.8.
5.9.
5.10.
Regulatory moratorium in Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent regulators in the OECD work on regulatory reform. . . . . . . . . . . . . . .
Deconcentrated and decentralised authorities in the Mexican context . . . . . . . . .
Constitutional and legal context of judicial review in Mexico . . . . . . . . . . . . . . . . .
Best practice for utility regulation and economic regulators in the UK
and Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current reform proposals for the COFETEL and in the energy sector . . . . . . . . . . .
End user tariff regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public private infrastructure financing schemes: PIDIREGAS and IPPs . . . . . . . . . .
Defining the components of system reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Global power sector investment needs 2001-30: the IEA view . . . . . . . . . . . . . . . . .
Grid management and system operation: three different approaches . . . . . . . . . .
Dealing with vertically integrated utilities in the network industries:
accounting separation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State enterprises and competitive neutrality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independent regulators in the infrastructure sectors . . . . . . . . . . . . . . . . . . . . . . . .
The structure and regulation of Mexico’s natural gas sector . . . . . . . . . . . . . . . . . .
Communicating electricity reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
91
95
119
144
149
175
177
183
187
191
193
197
199
201
203
Tables
2.1.
2.2.
2.3.
4.1.
5.1.
5.2.
Start up a business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Number of days and formalities required to start-up a business. . . . . . . . . . . . . . . 43
Economic impact of SARE in selected municipalities . . . . . . . . . . . . . . . . . . . . . . . . 44
Operating costs covered by water user charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Electricity average prices (cent/KWh) 1995-2003 by category of consumer. . . . . . . 179
National electricity sector, price/cost ratio for different user categories, 2003 . . . 181
Figures
1.1. Mexico’s relative output and growth performance. . . . . . . . . . . . . . . . . . . . . . . . . . .
1.2. Factors contributing to Mexico’s manufacturing exports to the United States . . .
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19
7
TABLE OF CONTENTS
1.3.
1.4.
2.1.
2.2.
2.3.
4.1.
4.2.
4.3.
4.4.
4.5.
5.1.
5.2.
5.3.
5.4.
5.5.
5.6.
5.7.
5.8.
5.9.
5.10.
5.11.
8
Aggregate infrastructure indicators in OECD countries . . . . . . . . . . . . . . . . . . . . . . .
Governance indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Draft regulations sent to COFEMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory proposals received by COFEMER with RIA by type of legal
instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Composition of the Federal Registry of Formalities and Services. . . . . . . . . . . . . . .
Independent regulatory agencies (IRA) in EU member States, Norway
and Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico’s density of fixed lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico’s density of mobile lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business telephone charges, OECD composite basket . . . . . . . . . . . . . . . . . . . . . . . .
Financing sources of OECD regulatory authorities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Power generation growth 1990-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth in transmission capacity 1993-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electricity exports and imports 1992-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electricity consumption and GDP growth 1993-2002 . . . . . . . . . . . . . . . . . . . . . . . . .
Electricity consumption projections 2003-12 (planning scenario) . . . . . . . . . . . . . .
Comparative assessment of household electricity prices around the OECD . . . . .
Percentage of the population connected to the electricity public service. . . . . . . .
Reserve margins for the interconnected grid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected development of generation technologies 2002-12 . . . . . . . . . . . . . . . . . . .
Increase in gas imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment needs 2002-11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
22
54
56
57
92
110
111
111
125
168
169
170
171
172
180
182
184
184
185
186
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OECD Reviews of Regulatory Reform: Mexico
Progress in Implementing Regulatory Reform
© OECD 2004
Summary
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
9
SUMMARY
M
exico has made significant progress in implementing regulatory policies. A range of
measures were introduced since the 1999 OECD Review on Regulatory Policy in Mexico.
They reformed public institutions and modified legal and policy instruments, in order to
improve regulatory quality. The main goals of this monitoring exercise are to assess the
progress made since 1999 and to identify some of the lessons learned from the
implementation process. For this purpose, the exercise covers the core issues of capacity
for regulatory quality and market openness. Comprehensive chapters on regulatory
authorities and the electricity sector complete the analysis. They shed more light on some
aspects that were not addressed in the 1999 Report.
In the last few years, regulatory reform has been a central element of Mexico’s
economic transition and market openness strategy. Most of the achievements of the
Mexican regulatory programme have occurred in the midst of a political transition and in
the middle of a period of much improved economic performance. However, the economic
recovery remains insufficient to increase the average standards of living of the population
due to dynamic demographic trends. Although the pace of reforms has been kept up, a
number of structural weaknesses constrain productivity growth. A major challenge for
Mexico is to push forward these structural reforms in essential service and infrastructure
sectors that could boost the competitiveness of the economy.
In terms of government capacity to ensure high quality regulation, the Mexican
government introduced legal, institutional and policy changes to its Regulatory Improvement
Programme, reforming the Federal Administrative Procedure Law and creating the Federal
Regulatory Improvement Commission (Comisión Federal de Mejora Regulatoria, COFEMER), which
plays an oversight role to ensure regulatory quality and works as an “engine of reform” in the
Executive branch. The Ministry of the Public Administration has been responsible for
regulatory improvement within the public sector as well as for co-ordinating the general
modernisation process of the federal public administration.
COFEMER coordinates arrangements with Ministries and federal agencies, increasing
responsibility and discipline in the regulatory process. It implements regulatory policies
across levels of government through agreements with state governments. It has set up the
Rapid Businesses Start-up System (Sistema de Apertura Rápido de Empresas, SARE), which
allows firms to comply with federal, state and municipal regulations and start operations
in fewer than three days, improving the climate for doing business and investing. The
Commission has also improved the use of regulatory tools such as Regulatory Impact
Assessment (RIA), and increased transparency in implementing of regulation. It has
developed a Federal Registry of Formalities and Services (Registro Federal de Trámites y
Servicios, RFTS) that contains, streamlines, actualises and maintains publicly available all
formalities and services of the federal administration.
Regulatory reform has reinforced Mexico’s approach towards market openness. New
institutions and amendments to different laws have enhanced the market orientation and
trade and investment-friendliness of the regulatory environment. Domestic regulation and
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SUMMARY
technical standards have improved due to the extension of public consultations and more
transparent processes. The Mexican government has consolidated and expanded the free
trade agreements’ network. Unnecessary trade restrictiveness has been reduced through
RIA and the revision process of the RFTS. Trade facilitation has seen major improvements
through several modifications introduced to the Customs Integral Automated System
(Sistema Aduanero Automatizado Integral, SAAI), simplifying the customs clearance process
and incorporating risk management information.
Political leadership at the highest level as well as co-ordination among political actors
have been fundamental for implementation. The Executive branch has had a leading role
in the process, but Congress has gradually been more involved. A consistent trade policy
has been put in place, providing a clear legal framework for domestic and foreign investors.
The involvement of other actors to the debate, represented in the Regulatory Improvement
Council, a political advisory body, has strengthened regulatory policy. The wide use of RIA
has helped to integrate best practices into the regulatory process. The use of ICT, especially
the Internet, has proved to be a valuable tool to implement regulatory policy.
Despite these achievements, some challenges remain. Exemption of the taxation area
from the regulatory improvement process has had repercussions on citizens’ and businesses’
activities. Inconsistencies between national regulations and international obligations require
attention, and tariff and regulatory barriers have been identified. In the trade area, modest
progress has been made with respect to the use of internationally harmonised standards and
the recognition of conformity assessments performed in other countries. Concerning RIA,
inefficiency in data quality has been recognised. The lack of structure and hierarchy among
regulatory instruments and the administrative act has an impact on the overall quality of the
regulatory framework. Congress is increasingly making use of its legislative faculties, which
generates a great volume of legislation that is not subject to the regulatory quality
requirements. Weak enforcement and compliance mechanisms hinder positive results. The
complexity of the legal and judicial system has negatively affected the enforcement of
regulations. Abuses of the amparo (appeal) process have had economic implications,
suspending the implementation of administrative decisions.
Further policy challenges are closely related to key economic sectors that are essential for
Mexico to fully realise its potential for strong long-term economic growth and for improving
the competitiveness of its economy. The review also analyses the governance arrangements
and the regulatory framework of four agencies: the Federal Telecommunications Commission
(Comisión Federal de Telecomunicaciones, COFETEL), the National Water Commission (Comisión
Nacional del Agua, CNA), the National Banking and Security Commission (Comisión Nacional
Bancaria y de Valores, CNBV) and the Regulatory Energy Commission (Comisión Reguladora de
Energía, CRE). These regulatory agencies are considered to be “deconcentrated bodies” under
the Mexican public administration framework. This reflects the hierarchical authority exerted
by ministers on all bodies or units under their responsibility, while searching for administrative
efficiency through managerial deconcentration. This institutional design does not provide
enough power or independence to regulatory authorities to perform their regulatory function.
The governance arrangements for regulatory authorities should normally ensure
independence from political intervention and from regulated interests.
The system for ensuring judicial accountability involves the appeal proceeding
(amparo) designed to protect individual constitutional liberties, which has significant
implications for the regulatory authorities, particularly due to the suspending effects of
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SUMMARY
judicial decisions. Many amparos mobilise significant public and private resources,
affecting key sectors of the economy. In order to reduce appeal-related delays on the
decision-making process, the amparo system might be streamlined.
The institutional design provides regulatory authorities in Mexico with a relatively
clear sectoral definition. Most of them enjoy “economic” powers, which include granting
and revoking licenses and permits, but some of these powers are shared with the line
ministries. The power of setting prices remains limited. All authorities enjoy advisory
powers, i.e. giving non-binding advice to line ministries on policy and regulatory matters,
but these are usually not exerted publicly. The joint exercise of powers with the supervising
Ministries raises a number of difficulties, such as overlap in tasks, unnecessary delays or
lack of transparency in decision making. Clarifying the objectives of some of the agencies
is an important challenge for the future, particularly in the water sector.
The co-ordination between regulatory authorities and other types of agencies, such as
the competition authority (Comisión Federal de Competencia, CFC) could be more developed
than it has sometimes been in the past. The CFC is promoting competition principles
across the whole economy. A clearer definition of interaction and a shared policy view in
ensuring consistency and agreement would have an impact on arrangements for securing
competitive conditions. Stronger collaboration between sectoral regulators and the
Consumers’ Protection Agency (Procuraduría Federal del Consumidor, PROFECO) would also
contribute to improving consumer welfare.
The electricity sector is subject to an important debate in Mexico. Participants agree that
significant reforms are required, but differences exist on key issues. Although grid expansion
and consolidation to cover the vast majority of the population is a major achievement,
important infrastructure investments are needed over the next few years to update the
electricity system and cope with rising demand. A well-functioning electricity system is
important for social reasons and to underpin economic competitiveness. The best long term
scenario lies in the development of a competitive market, in order to attract private investment
and generate sustained pressures for efficiency. Whatever the reform path, the current
regulatory and governance framework need strengthening to put the finances and governance
of the two main electricity companies on a sounder footing, and to establish a strong regulator.
This should help to promote cost recovery, and improve efficiency service quality.
The electricity sector is an area of national ownership and state responsibility
according to the Constitution: the State has exclusive rights over all activities related to the
provision of electricity public service (generation, transmission, distribution and supply).
The need for reform to encourage investment and modernisation led to amending the law
on the public electricity sector (LSPEE) in 1992, which opened the way to a significant
participation by private players in generation. The regulatory framework was updated
in 1995 by giving powers over the electricity sector to the Energy Regulatory Commission
(CRE). Two State-owned entities are responsible for the electricity public service: the CFE
(Comisión Federal de Electricidad) and LFC (Luz y Fuerza del Centro). They own all transmission
assets, under the delegated control of the CFE system operator, the National Energy Control
Centre (CENACE). CFE is the main generator while LFC has the responsibility for the Federal
District of Mexico City. Several Ministries oversee the sector: the Ministry of Energy,
(Secretaría de Energía, SENER) is responsible for overall policy, planning and strategy.
The Ministry of Finance (Secretaría de Hacienda y Crédito Público, SHCP) has financial
responsibility for CFE and LFC, and approves their budgets as State enterprises. It also
establishes the tariff methodology and sets tariffs for the electricity public service.
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SUMMARY
Current regulation reflects the limited legal market entry options, and a longstanding
subsidisation of electricity tariffs. In practice, tariffs do not reflect costs because of the heavy
subsidisation of the residential and agricultural sectors. It is also difficult to establish actual
costs because of a complex subsidy system which lacks transparency, mixing the rate of
return on assets, payments for infrastructure investment, and subsidy payments.
Different reform proposals for the modernisation of the electricity sector have been
tabled by the previous and current administration to Congress. A central feature of any
reform that aims to develop competition is the framework for system operation and access
to the grid. An independent system operator is necessary to ensure competitive neutrality
between CFE and new market entrants. The effective ex ante regulation of access to the grid
is also very important. A strong and more independent regulator will also be needed to
oversee the market, with a robust, transparent and credible framework.
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ISBN 92-64-01750-X
OECD Reviews of Regulatory Reform: Mexico
Progress in Implementing Regulatory Reform
© OECD 2004
Chapter 1
Mexico Monitoring Exercise: Synthesis
This chapter analyses recent developments in regulatory policies in Mexico. The
chapter focuses on government capacities to ensure high quality regulation with
particular attention to the implementation of the recommendations of the 1999
Review on Regulatory Reform. It monitors progress made and identifies
challenges on the domestic reform agenda.
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1. MEXICO MONITORING EXERCISE: SYNTHESIS
Introduction
Mexico has improved its regulatory framework, reforming public institutions and
modifying legal and policy instruments. Regulatory policy has been strengthened to
increase the flexibility of the national economy, to improve the regulatory environment for
domestic and foreign businesses, and to enhance the competitiveness of the Mexican
economy in the global market. These changes have occurred in the midst of a major
political transition and in the middle of a period of much improved economic performance,
with strong growth and smaller current account and public sector deficits. However,
although it has taken root, economic recovery is still insufficient to increase the average
standard of living of the population, as GDP per capita is not much above a third of the
OECD average (in PPPs). A number of structural weaknesses constrain productivity growth
and require a proactive growth-oriented strategy. Therefore, a major challenge for Mexico
is to push forward structural reforms in essential service and infrastructure sectors that
could boost the competitiveness of the economy.
The OECD Review on Regulatory Reform in Mexico (hereafter “1999 Report”) followed 15 years
of rapid expansion of reforms to transform the country from an inward-looking to an open and
market-based economy. In light of successive economic crises in the 80s and early 90s, the
Mexican government had begun work to create a systematic regulatory reform programme to
restore confidence in public institutions and increase the potential benefits derived from the
market liberalisation policies implemented since Mexico’s accession to GATT in 1986. The 1999
Report made a number of recommendations towards a wider constituency for reform. It
advocated for strengthening institutions and implementation capacities within the public
administration. It also noted regulatory weaknesses in infrastructure sectors which could
undermine economic performance and compromise overall growth.
During the last few years, the Mexican government has kept up the pace for reforms,
particularly at the federal level. Regulations are now subject to quality criteria: tools and
processes used in designing regulations are themselves subject to critical assessment.
More transparent mechanisms have been introduced to attain high quality regulation.
Market openness and competition are better integrated into regulatory reform. The current
exercise has been designed to assess the progress made since the 1999 Report. It
specifically monitors the implementation of policy recommendations on government
capacity to assure high quality regulation and on market openness, while shedding more
light on some aspects which had not been addressed at the time it was published,
including regulatory authorities and electricity.
The scope and breadth of reforms remain uneven, particularly with regard to some
infrastructure sectors. Some key areas still require government action to make regulatory
policy an effective tool for social and economic welfare. A more comprehensive approach for
regulatory quality and the refinement of regulatory tools should be embedded in all levels of
government. Trade policies have to be complemented by measures tending to increase
transparency and give more certainty to foreign direct investors. Competition policy should
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MEXICO MONITORING EXERCISE: SYNTHESIS
be further reinforced as a core factor contributing to regulatory and trade policies, so real
market access is granted to all participants. Last but not least, enforcement and compliance
mechanisms should also be strengthened. Significant efforts to reform the judicial system,
already underway, should have a significant impact on perceived regulatory quality.
Sectoral aspects also deserve further attention, particularly if the long term growth
potential of the economy is to be raised in the future. These are addressed in two additional
chapters. The chapter on regulatory authorities concentrates on four institutions of different
economic sectors: the banking regulator (Comisión Nacional Bancaria y de Valores – CNBV), the
national water authority (Comisión Nacional del Agua – CNA), the telecommunications regulator
(Comisión Federal de Telecomunicaciones – COFETEL) and the energy regulator (Comisión Reguladora
de Energía – CRE). These institutions are part of the Mexican system of “deconcentrated
authorities”, but they present considerable differences which reflect the complexity of
regulatory authorities’ design in the Mexican institutional landscape. The current framework
of regulatory bodies has led to inefficiencies and limited performance, with implications for
these sectors and the economy as a whole. This requires careful analysis of the regulators’
design, in terms of independence and powers, promotion of efficiency and competition, and
their relationship to their respective sectors and other agencies. Independence needs to be
reinforced while ensuring that regulators remain accountable. Some of the judicial aspects of
appeals also need to be streamlined to increase the efficiency of the regulatory framework.
Finally, the functions of some of the regulators need to be clarified, with an effective
distribution of their responsibilities with the line ministries.
The electricity sector is the subject of a major debate in Mexico on how reforms should
be implemented. New regulatory and governance arrangements in this sector need to be
developed, in order to improve efficiency, secure adequate future investment, and to
support the future competitiveness of the Mexican economy. As a contribution to this
discussion, an analysis of reform options is presented.
Economic performance
In many respects Mexico’s economic performance has improved in the closing years of the
20th century. GDP growth was vigorous – averaging almost 5% in the expansion phase
of 1996-2000 – inflation came down, and the current account and the public sector deficits
fell to relatively low levels in percentage of GDP. The downturn which followed the United
States’ slowdown in 2001 has had a mild impact on Mexico’s economy. There has been an
improvement in economic conditions that owes much to sound macroeconomic policies.
The high degree of synchronisation between the United States and Mexico has highlighted the
very close integration between the manufacturing sectors of the two countries. Another
striking feature of recent economic developments is that international investors appear to
have decoupled Mexico from other emerging markets. In particular, at the time of the
Russia and Brazil crises in 1998 and 1999, or the Argentina crisis of 2001, contagion effects
on Mexico were more contained and short-lived than in other emerging markets.
However, the growth performance of Mexico has been insufficient, even abstracting from the
recent cyclical weakness (2001-03). Mexico’s GDP per capita, is equivalent to about one
quarter of that of the United States and 36% of the OECD average (measured at purchasing
power parity exchange rates, PPPs). Over the 1990s, which witnessed a severe recession in
the aftermath of the peso crisis, per capita GDP increased by only 1½% per year (following a
decline in the previous decade) (Figure 1.1). By contrast, over the 1990s, GDP per capita rose
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1. MEXICO MONITORING EXERCISE: SYNTHESIS
Figure 1.1. Mexico’s relative output and growth performance
Measured by real GDP
A. Real GDP, 1980 = 100
Mexico
B. Per capita GDP, 1980 = 100
Constant prices and constant PPPs
OECD
Korea
Ireland
Portugal
OECD
Greece
Mexico
Turkey
190
Per capita GDP, volume
OECD = 100, 2002
100
350
170
75
300
50
250
150
OECD
Mexico
25
200
130
150
110
100
90
50
1980
1985
1990
1995
2000
1980
1985
1990
1995
2000
C. Growth performance in OECD countries1
Annual average growth over:
1994-2000
1981-2000
Ireland
Korea
Poland
Finland
Slovak Republic
Australia
Iceland
Norway
Canada
United States
Mexico
Portugal
New Zealand
Hungary
Sweden
Spain
Netherlands
United Kingdom
Turkey
Denmark
Greece
Belgium
Austria
France
Italy
Czech Republic
Germany
Switzerland
Japan
0
2
4
6
8
10
Per cent
1. The series for the Czech Republic, Germany (due to unification), Hungary and Poland are incomplete before 1991.
Source: OECD, Main Economic Indicators; OECD, National Accounts. From OECD, Economic Survey of Mexico, January 2004.
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by 3% or more in Greece, Portugal and Korea, three other countries with relatively low income
levels. Mexico’s potential GDP growth estimates have been revised down to below 4% in the
beginning of the 2000s, too low to catch up with more advanced OECD countries. The slow
potential GDP growth largely reflects the decline in gross fixed investment for three years
running, but also a number of structural weaknesses constraining productivity growth which
should be addressed by a broad growth-oriented strategy.
Growth-oriented policies are complemented by measures specifically addressed at
alleviating extreme poverty, which is appropriate, to ensure that benefits of stronger growth
are shared more broadly across population groups. While in the longer run, poverty can be
reduced as more people get more and better education and work opportunities, in the
short term, targeted programmes, such as those currently in place, are necessary to ensure
that the basic needs of the population are met.
Developments in early 2004 suggest that the recovery has taken root. Real GDP growth
strengthened in the course of 2003, underpinned by a resurgence of Mexico’s manufacturing
exports to the United States (Figure 1.2), and higher public spending:
●
In 2003, real GDP averaged 1.3% only; the current account deficit narrowed again (to 1.4%
of GDP), helped by terms of trade gains on account of oil prices. Inflation reached a low
of 4% in the later part of the year.
●
However, inflation expectations rose in the first quarter of 2004, prompting a response of the
Central Bank, which tightened the monetary policy stance three times (in February, March
and April). As a result, short-term interest rates rose above 6%, against 5% during most
of 2003, and it is assumed that they will edge up in 2004 and 2005, in line with US rates.
Figure 1.2. Factors contributing to Mexico’s manufacturing exports
to the United States
Disinflation has stalled
Stronger US industrial production is boosting exports
1
Headline inflation
Industrial production in Mexico
Core inflation1
Manufacturing export volumes2
Industrial production in the United States
Per cent
10
Per cent
20
15
8
10
6
5
0
4
-5
2
2000
01
02
03
04
-10
2000
01
02
03
04
1. Year-on-year percentage change. Core inflation excludes food and other items with erratic developments.
2. At constant prices of 1993. Year-on-year percentage change. 3-month average.
Source: Bank of Mexico; OECD. Published in OECD, Economic Outlook, No. 75, May 2004.
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1. MEXICO MONITORING EXERCISE: SYNTHESIS
●
The public sector borrowing requirement (PSBR, i.e. broad definition) was brought down
to 2½% of GDP in 2003 (½ point below its 2002 level), despite still weak activity. The
objective is to bring the public sector budget (narrow definition) into balance by 2005,
with the borrowing requirement (PSBR) down to 2% of GDP by then.
Growth is expected to become more broadly based over the 2004-05 horizon. The continued
momentum of the US manufacturing sector is expected to underpin the recovery of
business investment and employment in Mexico. In turn, stronger employment growth
will contribute to brisk household consumption. As it becomes more broadly based, growth
should accelerate, to perhaps 4½% in 2005 (OECD projections, published in Economic
Outlook, No. 75, May 2004), still not enough to ensure much improvement in standards of
living. The current account deficit is expected to widen somewhat as domestic demand
picks up, but remain below 2½% of GDP by 2005, mostly financed by foreign direct
investment.
The Central Bank’s readiness to respond quickly to changes to the inflation outlook in early 2004
was appropriate. Looking ahead, a firm policy stance and continued caution on the part of
the monetary authorities is required to bring consumer price inflation down and maintain
it in line with the Central Bank target of 3% plus or minus 1% over the medium term.
Regarding the financial sector, reforms taken in the aftermath of the 1995 peso crisis have
strengthened the Mexican banking system: it is now as solid and profitable as in other
OECD countries and the supervision and regulatory framework are close to best practice.
The state-owned development banks are currently being rationalised, and this is welcome.
Measures have been taken to strengthen supervision of the very dynamic Credit Unions
and Savings and Loans Institutions, which is appropriate.
There are a number of challenges ahead for fiscal policy. The pace of fiscal consolidation
that is foreseen is achievable, though difficult, given the large needs for essential spending
with great uncertainty attaching to oil-related revenue. Although the public sector deficit
has been reduced over the recent years, further improvements to put public finance on a
stronger footing are necessary, most notably on the tax front. Public spending in areas
conducive to economic development (poverty relief, human capital and physical
infrastructure) needs to be financed on a higher level and a more predictable basis.
Furthermore the government’s implicit and explicit liabilities will continue to affect the
budget over the medium term. Measures are required to raise tax revenue over the medium
term by some 2 percentage points of GDP, which appears to be a reasonable benchmark.
Even then, Mexico’s tax revenue (excluding oil-related revenues) would still be one of the
lowest among OECD countries. A widening of the VAT base, accomplished by eliminating
widespread exemptions and zero rating, would facilitate tax administration, and it could
be revenue enhancing even if the standard rate is lowered, and included measures to limit
the impact on low-income groups. Everyone agrees that more tax revenue is needed, but no
agreement has been reached on how to achieve this.
The most important challenge confronting the Mexican authorities is to close the very
large income gap between Mexico and more advanced OECD countries. This will require
policies and reforms that raise output growth in a durable way, especially via higher labour
and total factor productivity. Despite important data limitations, a broad measure of
economy-wide labour productivity suggests quasi stagnation in 1990-2000 (following a
decline over the previous decade). This insufficient performance reflects an abundant and
flexible supply of unskilled labour, much of it coming from the agricultural sector, which
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has led to buoyant employment growth in low-productivity sectors, such as construction or
retail trade. Emigration has been an important outlet for the high labour force increases.
But excess labour was mostly absorbed by the informal sector in urban areas, mostly made
up of self employed people occupied in very small units (of family size), in often unstable
jobs, but also in undeclared jobs in registered establishments.
The quasi stagnation of productivity in the non-farm economy reflects several, often interlinked,
factors: first, the growing concentration of employment in informal activities, exacerbated
by still low average skills of the employed population and very low levels of training,
making difficult the diffusion of more sophisticated production techniques; second, lack
of capital for many sectors, including low use of investment in Information and
Communication Technologies (ICT) and insufficient infrastructure capital which the
federal government is addressing in part through the e-México programme (Figure 1.3);
third, insufficient firm dynamism, with low exit rates of low-productivity firms and low
entry rates of innovative and potentially highly productive firms, a pattern which could be
explained, at least partly, by burdensome or inadequately designed regulations even if this
is being addressed in part with a new bankruptcy law,1 and strict and costly employment
protection legislation (also a factor in the existence of informal activities). Moreover a
serious and persistent problem is the poor rule of law, as illustrated by long judicial
processes, poor enforcement of judicial decisions, especially at the local level, weaknesses
in the protection of intellectual property rights and corruption (Figure 1.4).
To raise productivity growth and narrow the gap in living standards, more reforms are needed.
Solid progress has been made over the last decade on the structural front. Nevertheless
there remain several areas where efforts should be stepped up to correct inadequacies in
Figure 1.3. Aggregate infrastructure indicators in OECD countries
USA 1995 = 100
2000
1980
120
100
80
60
40
20
CZ
E
HU
N
M
EX
PO
L
TU
R
P
IT
A
DE
U
PR
T
KO
R
ES
BE
L
GB
R
JP
N
NL
D
GR
C
A
NZ
L
CA
N
FR
CH
E
AU
S
AU
T
L
N
FI
IS
NO
R
SW
E
IR
L
US
A
DN
K
0
Source: Nicoletti et al. (2003), “Policies and international integration: Influences on trade and foreign direct
investment”, OECD Economics Department Working Paper, No. 359.
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Figure 1.4. Governance indicators
2002
A. Rule of law1
ARG
-1
BRA
CHN
0
TUR
MEX
CHL
1
USA
CAN
2
CHE
3
-2
-3
Countries ranged from the “worst” to the “best”
CHL
USA
2
CHN
TUR
-1
ARG
0
BRA
MEX
1
FIN
B. Control of corruption2
CAN
3
-2
-3
Countries ranged from the “worst” to the “best”
Note: In this figure the grey area shows the statistically-likely range of the indicator. The midpoint on the line
corresponds to the best single estimate. In addition to NAFTA countries and some Latin America countries, the graph
indicates the last and first OECD countries besides Mexico in the ranking, as well as China.
1. The rule of law represents the extent to which agents have confidence in and abide by the rules of society. This
indicator includes perceptions of the incidence of both violent and non-violent crimes, the effectiveness and
predictability of the judiciary, and the enforceability of contracts.
2. Control of corruption measures perceptions of corruption conventionally defined as the exercise of public power
for private gain.
Source: World Bank, 2003 Governance Indicators, from OECD, Economic Survey of Mexico, January 2004.
the implementation of earlier reforms and overcome delays in others. The focus of reforms
should be to:
●
Ensure that resources for education and training are used more effectively, to close the
still dramatic skill gap of the Mexican workforce vis-à-vis most other OECD countries.
●
Raise and improve the stock of infrastructure capital.
●
Pursue labour market reform, to make it more attractive for employers to hire and
employees to work in the formal labour market.
●
Create an environment where the private sector invests and innovates more, easing
regulatory measures and other impediments, including addressing the problems in the
rule of law that weigh on entrepreneurial activity.
Regulatory reform has been a central part of government policy and, given sustained
political commitment and consistent implementation, can make a significant difference in
addressing several of the areas above. A better regulatory framework will create a growth
enabling environment, with better opportunities for private sector investors, and a better
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enforcement of the rule of law. Modernising the regulatory framework in key sectors such
as energy, water and telecommunications will also contribute to improve the stock of
infrastructure capital.
Progress made in regulatory reform since the 1999 review
A regulatory programme at the federal level was a central element of Mexico’s
economic transition. Why was regulatory reform so necessary? Structural reform had
required the dismantlement of an overregulated and protected domestic economy, where
industries and services were almost closed to foreign and national competition. Regulatory
policy was also part of a market opening strategy, promoting free trade and attracting
investment in the country. Thus, state interventionism was reduced, privatisation was
extended to a wide range of economic sectors and price controls were eliminated.
A broad regulatory programme has been introduced in a relatively short period of time
and in spite of difficult circumstances, i.e. economic constraints as result of the 1994-95
financial crisis. Indeed, the historic patterns of successive economic crises in the 1980s
and 1990s strengthened to the resolve to implement deep reforms that could help foster
greater stability and confidence. When the 1999 Report was published, there was not only
a recognised need to implement an economic strategy that could lead to a more efficient
and flexible economy, but a significant awareness of the importance of regulatory policy as
an instrument to achieve that goal.
What elements contributed to supporting the reform process in Mexico? Political
willingness and commitment to regulatory policy at the highest political level were
essential to put in place a regulatory programme that faced resistance from vested
interests in the federal administration. Support from businesses, concerned about the high
costs imposed by an overregulated economy, helped to deepen the reforms. Analysts
acknowledged that reducing the scope for discretion in decision making, which might have
led to policy mistakes and undermined the effectiveness of the reforms, was only possible
through promoting more transparent mechanisms within the decision-making process
and institutionalising the regulatory policy.
Regulatory reform, a dynamic process, is still incomplete. The 1999 Report made
recommendations for Mexico to move forward in different key areas, to consolidate a
sustainable implementation process that could help citizens and businesses to see
concrete benefits from the regulatory policy. Besides the need to redefine the scope of
regulatory policy and to build constituencies for reform across a broader range of public
and private interests, remaining gaps in the programme needed to be closed. The 1999
Report pointed out that implementation and enforcement should be strengthened. It made
the case for a more transparent, accountable and results-oriented administration, in order
to improve regulatory quality, that is, to enhance the performance, cost-effectiveness and
legal quality of regulations and related government formalities.
Government Capacity to Assure High Quality Regulation
Mexico introduced legal, institutional and policy changes to its regulatory programme
in 2000 to implement key recommendations set out in the 1999 Report. The reforms to the
Federal Administrative Procedures Law (Ley Federal de Procedimiento Administrativo, LFPA)
institutionalised a wide-ranging regulatory improvement programme that extended
regulatory policy. The Federal Regulatory Improvement Commission (Comisión Federal de
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Reforma Regulatoria, COFEMER) was created as a technically and administratively independent
body of the Ministry of Economy, to co-ordinate and to supervise the Regulatory Improvement
Programme of the government.
COFEMER’s main objectives include the oversight of the process for preparing federal
regulations and promoting and developing cost effective regulations that produce net
benefit for citizens and businesses. In order to achieve these goals, COFEMER carries out
four main activities: 1) elimination and simplification of business and citizens formalities;
2) transparent and analytical review of all draft regulations and their regulatory impact
assessments; 3) diagnosis of and proposals to reform existing laws and regulations in
specific areas or economic sectors; and 4) support for state and municipal regulatory
improvement programmes. COFEMER was empowered by law to conduct a more
comprehensive, forward-looking and consistent regulatory reform.
COFEMER therefore plays the role of an oversight body ensuring regulatory quality. It
has been able to formalise co-ordination arrangements with Ministries and other federal
agencies, reducing informal agreements among them. Even if not located at the centre of
government, COFEMER is under the umbrella of a core Ministry that is directly involved in
regulatory functions. COFEMER has placed itself in the Mexican institutional architecture
to legitimate government action on regulatory policy: it works as an “engine of reform” in
the Executive branch and helps to develop analytical expertise through controlling the
quality of Regulatory Impact Assessment (RIA), preventing duplication of procedures
among public entities, reducing poor quality regulatory practice and providing training and
guidance support.
The regulatory policy carried out by COFEMER includes a major effort to increase
responsibility and discipline inside the federal administration. Ministries and other
decentralised bodies are obliged to present Biennial Programmes to the Commission,
which include a list of potential regulations to be introduced in future policy actions and
identify high impact formalities, in order to modify or eliminate them.
Implementation of regulatory policies across levels of government has been a central
element of the Regulatory Improvement Programme. States and municipalities need to be
included in the effort, in order to expand the programme in a coherent way and to get
concrete benefits for citizens and stakeholders at municipal, state and federal levels. In
addition to the signing of agreements with local governments to incorporate Regulatory
Improvement Programmes, COFEMER launched the integrated Rapid Businesses Start-up
System (SARE) in 2002, allowing firms to comply with federal, state and municipal
regulations, and start operations in one business day (integrated SAREs are currently
operational in 21 cities). In a country where a large proportion of economic activity is
performed by micro and small enterprises such a system was strongly needed to improve
the climate for doing business and investing.
The refinement of regulatory tools has been a major achievement of the Mexican
administration. COFEMER has moved forward in different areas, such as the development
and improvement of RIA, increasing transparency in implementation of regulation and
alternatives to traditional regulation. Transparency is a key element that has been reinforced
introducing specific reforms of the regulatory process. COFEMER has emphasised its
importance not only during the revision of draft regulations through RIA, but also including
public participation in comment procedures and providing clearer legal requirements for
notice established by law.
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Transparency mechanisms have also been strengthened through the creation of the
Federal Institute of Access to Public Information (Instituto Federal de Acceso a la Información
Pública, IFAI), which enforce the Federal Law of Transparency and Access to Public Information
(Ley Federal de Transparencia y Acceso a la Información Gubernamental), enacted in 2002. IFAI
guarantees the effectiveness of both the right to access public information and the right to
privacy through data protection and promotes transparency and public sector accountability.
With an innovative internal structure that differs from other regulatory authorities in Mexico,
IFAI is a step forward to integrate transparent mechanisms in the public administration.
RIA has become a useful tool to evaluate, analyse and justify draft regulations. RIA
procedures have been improved with the introduction of clearer notions of efficiency
and targeted goals while choosing the best effective policy option. All ministries
and decentralised organisms of the federal administration have to submit a RIA with
every regulatory proposal that imposes compliance costs on private agents. COFEMER
systematically reviews not only their content, but also the legal foundation that supports
them; the justification provided by the institution on the specific obligations imposed on
private agents, the analysis of the potential effect of regulations and consideration of
viable lower costs alternatives. COFEMER disseminates knowledge about RIAs among
institutions through training courses and its electronic portal, which has proved to be a
major success of the development of the whole process.
COFEMER has developed a Federal Registry of Formalities and Services (Registro Federal
de Trámites y Servicios, RFTS) that contains, streamlines, actualises and maintains publicly
available all formalities and services of the federal administration. In this way, COFEMER
promotes the incorporation of good regulatory practices in the public federal
administration and keep regulations up-to-date.
The Ministry of the Public Administration (Secretaría de la Función Pública, former
Comptroller General) is responsible for internal regulatory improvement as well as for
co-ordinating the general modernisation process of the federal public administration. In order
to achieve these goals, it has developed different “Tools for Regulatory Simplification”. Even if
these initiatives are not compulsory for public servants, they introduce more transparent rules
to the administration and aim at the reducing regulatory burden for institutions.
A recent presidential decree signed in April 2004 established a regulatory moratorium
for a one-year period. It restricts the enactment of new regulation and forces federal
agencies to conduct, in conjunction with COFEMER, a review of existing regulations. It does
not apply to certain limited categories of regulations, including those that respond to
emergency situations such as those posing an imminent danger to human health or safety,
international or legislative obligations, or regulations whose benefits are significantly
greater than their costs and are uniformly supported by the private sector as a whole.
Enhancing market openness through regulatory reform
Regulatory reform has reinforced Mexico’s approach towards market openness. At
the institutional level, the Mexican administration has used the creation of institutions,
such as COFEMER or the Mexican Accreditation Entity (1999), and the enactment and
amendments of laws, such as the Federal Law on Acquisitions, Leasing and Services of the
Public Sector (2000), the Law of Public Works and Related Services (2000), the Foreign
Investment Law (2001) and the Foreign Trade Law (2003), to move forward in enhancing
the market orientation and trade and investment-friendliness of the regulatory
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environment. Specialised agencies of the federal administration, such as the Vice-Ministry
for International Trade Negotiations (SSNCI) and the Vice-Ministry of Industry and
Commerce in the Ministry of Economy, have contributed to the design of the trade policy of
the government taking into account the need to promote regulations that enhance
domestic and international trade and investment.
The formulation of domestic regulation and technical standards has significantly
improved due to the extension of public consultations and more transparent processes.
Some of the work done by COFEMER in this direction has accelerated the drafting,
amendment and application of trade-related regulations and the simplification of
administrative procedures and formalities. On the foreign trade front, the SSNCI works on
the harmonisation of domestic legislation with certain dispositions and language of
international trade instruments and on the reduction of inconsistencies between national
regulations and international obligations. Other areas in which transparency has been
reinforced are customs procedures and government procurement, tending to increase
participation of the trade community and to reduce discretionary and interpretative
powers of decision makers.
The consolidation and expansion of a free trade agreements’ network has been a clear
goal of the Mexican government. Since 1999 numerous economic complementation and
free trade agreements (particularly with the EU in 2000 and with Japan, which is in legal
review and should be signed in 2004), as well as bilateral investment treaties, have been
signed. Currently less than 10% of Mexico’s trade occurs at Most-Favoured-Nation (MFN)
rates. There has been some effort to extend non-discrimination principles, such as
National Treatment (NT) and MFN, to all WTO members. For example, the Foreign
Investment Law does not distinguish between foreign and domestic investors and most
benefits are extended to third parties.
The amendments to the Foreign Investment Law in 1998 led to a deregulation policy
through the establishment of a clear, self-contained legal framework, improving the
environment for domestic and foreign investors. 92% of all economic activities are fully
liberalised; the remaining sectors and activities can be subject to ownership limitations
(reserved to the Mexican state, to Mexican nationals or Mexican companies with a
foreigner’s exclusion clause) or prohibitions (activities under specific regulations, activities
requiring prior approval by the National Commission for Foreign Investment or activities
with additional constitutional limitations).
In the context of RIA, the Mexican administration has moved forward in order to
reduce unnecessary trade restrictiveness. The Regulatory Improvement Programme
specifies that proposed regulation should not impose unnecessary barriers to market
competition and trade and is enforced by the COFEMER. At the same time, unnecessary
restrictiveness in the stock of existing regulation is reviewed through the Biennial
Programmes and the RFTS developed by COFEMER. At state and local level, SARE has
served to partially improve the trade and investment friendliness of sub-federal regulation,
seeking to eliminate unnecessary restrictiveness. Sub-federal regulation has attracted
significant criticism from the private sector because of the additional formalities imposed
on businesses that can create delays and uncertainties in setting up or operating a
business. While this sub-federal regulation is the exclusive responsibility of state and
municipal governments, COFEMER actively promotes regulatory reform nationwide by
collaborating with interested local governments.
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The area of trade facilitation has seen major improvements through several
modifications introduced to the Customs Integral Automated System (Sistema Aduanero
Automatizado Integral, SAAI), which have increased transparency, predictability and
simplification to the customs clearance process and resulted in efficiency gains for
businesses and the government. Besides the inclusion of technological innovations that
tend to create a paperless trading environment, SAAI has recently incorporated risk
management information that might contribute to efficiency revenue collection and
inspection rates and delays. Compliance and enforcement mechanisms have also been
developed in this area: Mexico has followed international standards to further facilitate
border procedures and established a Customs Code of Conduct. Collective efforts between
Mexican customs and industrial sectors have materialised in public-private partnership
agreements that aim at preventing smuggling, protecting revenue and providing training.
However, there is room for further improvement, particularly regarding the registry of
importers (padrón de importadores), which increases the cost of importing and may decrease
competition in the commercial sector, especially in the case of “sensitive” products.
The harmonisation of mandatory technical requirements2 (Normas Oficiales Mexicanas,
NOMs) with international standards presents a mixed picture: the elaboration process of
Mexican standards is quite transparent, but the use of internationally harmonised
standards is modest and fairly uneven among sectors. This situation creates barriers for
access to the Mexican market and hinders the capacity of Mexican products to reach the
international marketplace. The problem also exists in the area of voluntary standards3
(Normas Mexicanas, NMXs), which do not follow the public consultation mechanisms and
the review process of COFEMER, and are sometimes directly referenced in mandatory
NOMs. On the other hand, the increase of mandatory standards (NOMs), as a proportion to
the voluntary ones (NMXs), reveals a tendency to regulatory interventionism in the area of
technical specifications. In terms of conformity assessment and accreditation, the first
private accreditation entity, Entidad Mexicana de Acreditación (EMA), was established in 1999
in the area of calibration, certification, consumer protection, and self-sustained through
accreditation fees and training. This is an important step for the development of quality
certification in the country.
Lessons from implementation
With a view towards modernising and simplifying the national regulatory framework,
Mexico has implemented many of the OECD policy recommendations set out in the 1999
Report. Its regulatory programme is part of broad government action. The interaction
between a “whole of government” regulatory policy, the establishment of a strong oversight
institution and appropriate regulatory tools have contributed to a positive outcome.
Regulatory policies
The implementation of regulatory policy requires determined political leadership at the
highest level. In Mexico, a strong executive has supported regulatory quality. The executive
has not only created new institutions in charge of conducting regulatory policy, but also has
enacted and amended different laws to institutionalise the Regulatory Improvement
Programme. In this process, Congress has gradually been more involved in the debate.
Co-ordination among different political actors has been a major factor to reduce
discretionary arrangements. The LFPA has introduced clearer procedures for regulatory
policy in the federal administration. In the last few years, regulatory policy has progressively
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been embedded at federal level, influencing a cultural change in different groups linked to
the public policy decision-making, even if the opposition of vested interests persists.
However, in terms of the regulatory policy, the programme of regulatory improvement
under the LFPA maintains the significant exemption of regulations in the area of taxation.
Applying regulatory reform principles to fiscal formalities and requirements can also have
a significant positive effect on citizen’s and businesses’ activities.
A consistent trade policy has been put in place, accompanied by a clear and selfcontained legal framework for domestic and foreign investors and avoiding unnecessary
trade restrictions, but tariff and regulatory barriers have been identified by national and
international parties. Inconsistencies between national regulations and international
obligations still need to be addressed, especially in areas where different laws, policies and
regulators are involved, such as the telecommunications sector. The major challenge for
Mexico is, however, to push forward structural reforms in order to promote private
investment in essential service and infrastructure sectors that could boost the productivity
and competitiveness of the economy, such as telecommunications or energy, which will be
discussed separately.
Modest progress has been made with respect to the use of internationally harmonised
standards and the recognition of conformity assessment performed in other countries.
Despite significant improvements of the transparency governing the elaboration of
Mexican standards, insufficient awareness of existing international standards hinders the
capacity of Mexican products to reach the international marketplace and creates barriers
for accessing the domestic market. International standardisation activities can help ensure
that specific considerations warranted by the environmental, climatic and other
conditions of the country are duly taken into account.
A more comprehensive multi-level approach could lead to more concrete results,
taking into account the important role of lower levels of government, including the states
and the municipalities. Co-operation agreements between the federal and state
governments and the SARE are significant steps to improve the regulatory environment at
sub-federal level. However, remaining gaps in the regulatory programme, such as the
reduction of delays for tax formalities (the attribution of the tax identification number can
take up to a month for businesses that do not obtain it through specialised notaries; while
physical persons currently obtain their tax identification number in one business day) and
the lack of streamlined state and municipal formalities, are still imposing major
requirements on businesses and citizens.
The 1999 report recognised that the 1993 competition law reflected a well-conceived
synthesis of modern economic principles, while noting that a clear base of support for
competition policy was lacking. Five years later, the OECD (2004) report on Competition
Law and Policy noted that the initial strengths remain and that the CFC has been able to
demonstrate its enforcement capacity, maturing into a credible and well-respected
agency, with a remarkable record of achievement given the political environment. Since
anticompetitive practices can undermine the benefits derived from liberalisation and
reduction of regulatory barriers, efforts have been made to integrate competition policy as
a key element in determining the degree of market openness. However, the degree of
general support for competition policy remains an open question, and certain deficiencies
in statutory authority and judicial review processes constrain the CFC’s ability to address
anti-competitive conditions effectively and efficiently.
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Regulatory institutions
In the last few years, more institutions in Mexico have actively participated in the
application of the Regulatory Improvement Programme. Presidencia de la República has
driven reforms, introducing the Programme itself and requiring active involvement from
core ministries dealing with regulatory policy. Other important actors – businesses,
academia, and social sectors – are integrated to the debate in a political body, the
Regulatory Improvement Council, which functions as a forum for discussions and
suggesting main guidelines. The political support of the Council has been significant,
specifically since the number of members has increased and now covers areas such as
consumer protection and competition policy.
COFEMER works closely with different ministries and federal agencies, monitoring and
assessing their regulations and draft proposals. The Ministry of the Public Administration
has also taken a leading role in terms of administrative simplification inside the federal
administration. Further co-ordination across ministries and federal agencies is a key
element to achieve concrete goals, especially since some vested interests within the federal
administration are still reluctant to be involved in the work on high quality regulation.
The regulatory framework in Mexico has also seen the introduction of institutions
with regulatory powers, such as in the telecommunications or in the energy sector.
Nevertheless, the governance arrangements of these regulatory authorities still pose
problems and are not yet generating the expected benefits of a high quality regulatory
framework. This element was already identified as part of the 1999 Report, and will be
discussed separately. Much remains to be done to strengthen and empower regulatory
authorities, increase their independence and eliminate distortions in the regulatory and
governance arrangements.
Regulatory tools
Mexico has strengthened its Regulatory Improvement Programme through the use of
specific tools, such as Regulatory Impact Assessment (RIA) that are widely used across
OECD countries. RIA has been recognised as a necessary step for improving regulatory
quality, in a systematic process for decision making that should be oriented towards
results and cost-effective regulations. In Mexico, compulsory use of RIA for each regulatory
proposal made by any institution of the federal administration as well as a comprehensive
update of regulations through a complete register of formalities and services represent
core commitments to integrate best practices into the regulatory process. Nevertheless,
data quality in RIA remains an issue that could be addressed through improved data
collection strategies and targeted training.
Transparency has contributed to high-quality regulation as more open negotiation
mechanisms with stakeholders and more transparent consultations with public opinion
have been developed. There has been an effort to integrate transparent elements during
the preparation of RIA, such as dissemination of information, integration of interested
parties in the whole process and revision of language drafting. The enactment of a Federal
Law of Transparency and Access to Information and the establishment of a regulatory
entity that will enforce it are important steps to expand transparency to all acts of
government. Public consultations mechanisms and the use of plain language drafting are
two areas which have to be developed further.
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Mexico has integrated the use of ICT to improve regulatory accessibility, participation and
accountability. Special mention should be made to the use of Internet as a credible tool to
implement regulatory policy: COFEMER bases most of the interaction with partners on the use
of different portals that serve to collect and to disseminate information on its different
programmes. In the same way, the potential of ICT-based approaches to improving
transparency has been realised in areas such as electronic data filing for RIA, one-stop shops
in the context of SARE, government procurement through COMPRANET, paperless border
procedures in the context of the SAAI or administrative simplification through TRAMITANET
and NORMATECA, but progress still needs to be made for this potential to be fully exploited.
This trend will be reinforced in the next years, since the current administration launched an
ambitious programme, called e-Mexico, to expand the use of ICT to all social groups with a
community perspective, contributing to the social and economic development of the country.
Despite these clear achievements, regulation is applied through a wide range of
heterogeneous legal instruments or administrative acts that are not clearly ordered in
hierarchical fashion. This makes for a complex legal architecture, in which officials of a rank
lower than vice-minister can sometimes emit administrative acts of general application by
way of delegation. In addition, Mexico’s Congress has made increasing use of its legislative
faculties and generated a greater volume of legislation in recent years that is not subject to
the regulatory quality requirements established in the executive branch.
Last but not least, weak enforcement and compliance mechanisms are hindering
positive results that could benefit all sectors of society. Even if important steps have been
taken to make sure that resources will be available to implement regulatory decisions and to
fight against corruption at all levels of government, compliance is highly affected by a wide
informal economic sector that perceives regulation as an excessive cost. The complexity and
some inefficiencies of the Mexican legal and judicial system have negatively affected the
enforcement of regulations. The litigious abuse of the amparo process gives a clear picture of
the situation, as it suspends the implementation of an administrative decision, sometimes
for many years, with wide ranging economic implications.
Further challenges
Regulatory policy needs to adopt a “whole of government” perspective to fully reach its
goals. This involves undertaking reforms to the current regulatory framework of key
infrastructure areas, in order to increase opportunities for private investment and improve
economic competitiveness. The sectoral issues addressed here involve the regulatory and
governance arrangements of regulatory authorities in vital economic activities (water,
energy, financial services and telecommunications). An in-depth review of the electricity
sector, which was not discussed in the 1999 Report, is included in this exercise.
Regulatory agencies: the case of energy, water, financial services
and telecommunications
The regulatory authorities deal with key economic sectors that are essential for
Mexico to fully realise its potential for strong long-term economic growth and for
improving the living conditions of the population. This requires attracting new investment,
increasing responsiveness to consumers’ needs and streamlining economic efficiency in
order to promote access to services. Establishing a regulatory framework that gives stability
as well as proper incentives to economic activity and fosters trust and transparency in
consultation with the private sector is fundamental in this process.
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The historical circumstances that determined the creation of these regulatory
authorities differ. While the National Water Commission (CNA) responded to historical
needs related to land distribution, irrigation system and income transfers to rural
population, the National Banking and Security Commission (CNBV) was set up after the
financial crisis in 1994-95, merging two previous regulatory agencies and increasing their
powers. The Regulatory Energy Commission (CRE) emerged following a limited opening of
energy markets in the early 1990s and the Federal Telecommunications Commission
(COFETEL) was created as part of the liberalisation strategy six years after the privatisation
of the former state owned company to oversee the progressive opening of the market for
long distance and mobile telecommunications.
The regulatory agencies are considered “deconcentrated bodies”, under the Mexican
public administration, whose origin can be found in the 1976 Federal Public Administration
Law. This framework reflects the traditional administrative organisation, based on direct
authority exerted by the ministers on all the bodies or units under their responsibility,
while searching for administrative efficiency through managerial deconcentration.
However, some of the regulators created by more recent laws reflect a slight evolution
compared with the original model, which has led to a situation with blurred boundaries. In
this context, revising the legal order that upholds the regulatory authorities to give them
more powers and significant independence represents a major challenge.
The system for ensuring judicial accountability involves an appeal proceeding
designed for the protections of individual constitutional liberties, called “amparo” in
Mexico, which has significant implications for the regulatory authorities, particularly due
to the revoking effects of judicial decisions. While regulatory authorities have to be part of
an institutional framework where independence and accountability are well balanced, the
amparo can be used with the sole aim of suspending a regulatory authority’s decision,
undermining its powers. Many amparos are questionable, mobilising significant private and
public resources and having serious implications on key sectors of the economy.
Regulatory authorities in Mexico have a relatively clear sectoral function. CNBV,
COFETEL and CRE have generally “economic” powers, which include granting and revoking
licenses and permits, even if some of these powers are shared with the line ministries. The
powers involve setting prices to a very limited extent, for the CRE for gas and for COFETEL
only for the services included in the price cap of Telmex, specified in its title of concession,
because tariffs are not otherwise regulated in the telecommunications sector. CNA has an
environmental, health and safety function. All the authorities enjoy advisory powers, i.e.
giving non-binding advice to line ministries on policy and regulatory matters, but these are
rarely exerted publicly. Nevertheless, in a number of cases powers are exercised together
with the supervising Ministry, which raises a number of difficulties, such as overlap in tasks,
unnecessary delays in formalities or lack of transparent mechanisms of decision making.
The co-ordination between the sectoral regulatory authorities and other types of
agencies, such as the competition authority (CFC) could be more developed than it has
sometimes been in the past. The CFC has been promoting competition principles in several
sectors of this study by participating in the design of new regulations, as well as by
evaluating prospective participants in privatisations and allocation of concessions, permits
and licences. A clearer definition of interaction and a shared policy view in ensuring
consistency and agreement would have an impact on arrangements for securing competitive
conditions. The collaboration agreement between CFC and CRE in 2003 is a positive step.
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Stronger collaboration between the sectoral regulators and the Consumers’ Protection
Agency (Procuraduría Federal del Consumidor, PROFECO), such as through the collaboration
agreement between COFETEL and PROFECO, would also contribute to improving economic
and social welfare for consumers.
Regulatory authorities represent key elements for regulatory reform in Mexico. As
regulatory bodies and deconcentrated authorities, they are subject to the same rules as the
central federal government administration, in terms of access to significant information,
preparing new regulations and transparency. However, regulatory quality also involves
improving clarity in decision making, through systematic public statements, including for
individual cases, as well as predictability and consistency of decisions with legislative
mandates. Institutional and democratic dialogue is also important not only to involve
actors such as the Congress in the regulatory debate, but to expand the discussion to
citizens and the media.
Electricity sector
The electricity sector is the subject of an important debate in Mexico. It is generally
acknowledged that significant reforms are required, even if there is less agreement on the
options. Although grid expansion and consolidation to cover the vast majority of the
population is a major achievement, important infrastructure investments are needed over
the next few years to update the electricity system and cope with rising demand. Even with
the support of private generation made possible by the 1992 changes, it is not clear how the
totality of projected generation capacity needs for the next ten years will be met. The
transmission and distribution grids need maintenance and upgrading to secure good
service quality standards. A well-functioning electricity system is important for social
reasons and to underpin economic competitiveness. It is, however, increasingly difficult to
justify or support major public investment in electricity because of the burden on public
debt, and the urgent need for investment in other programmes such as education and
health. The best long term scenario lies in the development of a competitive market, in
order to attract private investment and generate sustained pressures for efficiency.
Whatever the reform path, the current regulatory and governance framework needs
strengthening to put the finances and governance of the two main electricity companies
on a sounder footing, and to establish strong regulation for the promotion of cost recovery,
efficiency improvements, and high quality service.
The electricity sector in Mexico is part of the principle of national ownership and state
responsibility included in the Constitution: the State has exclusive rights over all activities
related to the provision of electricity public service (generation, transmission, distribution
and supply). Thus, this sector is regulated at federal level by the Constitution, by a number
of primary laws, such as the Electricity Public Service Law (LSPEE), and by secondary
regulations. The need for reform to encourage investment and modernisation of the sector
led to some amendments to the LSPEE in 1992, which opened the way to a significant
participation by private players in generation. Independent power producers (IPPs) were
allowed into generation supply power for the public service on long term contracts, and
private self supply, co-generation, small-scale production, and imports and exports were
also allowed. The regulatory framework was updated in 1995 by giving powers over the
electricity sector to the Energy Regulatory Commission (CRE).
Two State-owned entities are responsible for the electricity public service: the Federal
Electricity Commission (Comisión Federal de Electricidad, CFE) and Central Light and Power (Luz y
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Fuerza del Centro, LFC). They own all transmission assets, under the delegated control of the CFE
system operator, the National Energy Control Centre (CENACE). CFE remains the dominant
generator. Several Ministries oversee the electricity sector: the Ministry of Energy, (Secretaría de
Energía, SENER) is responsible for overall policy, planning and strategy. The Ministry of Finance
(Secretaría de Hacienda y Crédito Público, SHCP) has financial responsibility for Ministry for CFE
and LFC, and approves their budgets as State enterprises. It also establishes the tariff
methodology and sets tariffs for the electricity public service. The main responsibilities of the
regulatory authority, CRE, are to manage the permit system for private players, and to regulate
the interface between private generation and the public electricity service.
Current regulation reflects the limited legal market entry options, and a longstanding
subsidisation of electricity tariffs. End user tariff structure is based in principle on cost of
service, and on a system that puts users into different groups (residential, commercial,
public services, agricultural and industrial). However, in practice tariffs are not costreflective because of the heavy subsidisation of the residential and agricultural sectors. It
is also difficult to establish actual costs because the subsidy system lacks transparency and
is complex. CFE must pay the government a rate of return on the assets that it uses to
provide the electricity public service (“aprovechamiento para obras de infraestructura eléctrica”),
but the money is more or less returned to CFE so that it can invest in infrastructure
investment to support electricity public service. The payment can also be set against the
revenue losses incurred in tariff subsidisation. This system, therefore, mixes up the rate of
return on assets, payments for infrastructure investment, and subsidy payments.
Different reform proposals for the modernisation of the electricity sector have been
tabled by the previous and current administration to Congress. A first unsuccessful attempt
was made by President Zedillo in 1999 in the form of a proposal based on strong market
opening and supporting Constitutional amendments. After this failure, a modest extension
of the 1992 LSPEE law was sought. The amendment was challenged and there was an appeal
to the Supreme Court. Five members of the Court noted that the 1992 law – and other related
laws – might be unconstitutional. Although the law cannot be challenged directly, the fact
that it appears to be inconsistent with the Constitution implies that it would be risky to table
any further amendment to the LSPEE, and that the only safe approach to reform aimed at
further market opening would be to amend the Constitution.
Several different reform proposals are currently on the table, including one of the Fox
administration. Some propose comprehensive changes whilst others would make only
limited changes and even limit the current scope for private participation in generation.
President Fox’s proposal is to promote more private investment and open the sector to
competition, whilst at the same time promoting coexistence of a public electricity sector
and public companies with private companies. To achieve these aims the proposal includes
changes to the Constitution as well as to related laws. In terms of promoting competition
the proposal is weaker than the 1999 reform proposal.
A central feature of any reform that aims to develop competition is the framework for
system operation and grid access. The two stages for separating system operation from
CFE suggested in the President Fox proposal may be expected to delay competition. An
independent system operator is necessary to ensure competitive neutrality between CFE
and new market entrants. The effective ex ante regulation of grid access is also very
important. A strong regulator will also be needed to oversee the market. The regulatory
framework needs to be robust, transparent, independent and credible.
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Challenges and options for the future
In the last few years, Mexico’s economic performance has been characterized by
macroeconomic stabilisation, and some economic recovery after the 1994-95 recession, but
still by unsatisfactory levels of economic growth in the long term, particularly taking into
account the needs of a growing population. Potential growth is constrained by low levels of
human capital, while additional fiscal resources are needed to improve and expand
inadequate physical infrastructure and combat widespread acute poverty that lead to poor
health and social marginalisation.4 The large informal sector of the economy represents
another challenge, with missed fiscal opportunities, lack of economic certainty and
reduced access to key services.
Promoting private investment and innovation in key infrastructure sectors is required
to improve the long term potential, particularly in sectors such as energy, water and
telecommunications. Despite significant efforts at the federal level to streamline
regulations, the fiscal system remains complex, discouraging entrepreneurial activity, and
sub-federal regulations often represent a challenge for small and medium size enterprises.
Regulatory policy can contribute to meet these needs, by easing regulatory burdens,
simplifying economic activity, reinforcing the rule of law and increasing certainty for the
private sector.
Government capacity to assure high quality regulation and market openness
The 1999 Report pointed out important areas that should be revised to assure high
quality regulation and improve trade policy. In the coming years, Mexico should continue
with the efforts of recent years, embedding regulatory quality to all levels of government
and broadening regulatory reform to different sectors of the economy, in order to
contribute to boost economic growth, to attract private investment and to enhance the
competitiveness of the economy. Regulatory policy has to be seen as a tool for economic
and social development. Specific recommendations can be made in the following areas:
Regulatory policies
The exemption regarding fiscal formalities contained in the Federal Administrative
Procedure Law could be removed, in order to streamline and simplify them, in order to
reduce significant costs to business and citizens.
The scope of the Regulatory Improvement Programme should be extended at lower
levels of government. Trade policy has to avoid unnecessary restrictiveness also at the state
and local levels. The federal government should work with more states and municipalities
towards implementing the SARE, in order to simplify formalities and reduce entry barriers
for opening businesses nationwide. The delays for obtaining a tax identification number
should be reduced.
Regulatory institutions
Intra-governmental co-ordination between government agencies, in respect to
regulations and practices, can be strengthened.
Co-ordination and more substantial involvement between the Federal Improvement
Commission (COFEMER), the Federal Competition Commission (CFC) and sectoral
regulators are basic for integrating competition principles into the regulatory policy.
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Regulatory tools
A clear hierarchy of regulations (administrative acts of general application) would
contribute to promote a clearer and more efficient legal framework. The architecture of
legal measures, as it stands today, is rather complex and in cases affects transparency, legal
certainty and compliance efforts.
A number of regulatory tools could be refined, such as consultation mechanisms, plain
language drafting, and technical assistance towards regulatory quality for the legislative
branch.
The use of ICT should continue to be promoted, directly linked to the achievement of
goals on trade policy, such as electronic transmission of permits and health/sanitary and
phytosanitary certificates into the SAAI, as well as paperless border procedures and single
window for trade facilities.
The use of internationally harmonised standards should be enhanced. The process of
the five-year review of NOMs to improve the awareness of standard-setting agencies could
be used in order to attain harmonisation.
Compliance and enforcement mechanisms should be strengthened. A clear measure
could be to pursue the implementation of the Customs Code of Conduct. The “amparo”
system could be streamlined to reduce the effect of appeal-related delays on the decisionmaking process.
Regulatory authorities
The framework for regulatory authorities should be modernised and revised. Their
governance arrangements, to ensure independence from direct political intervention and
from regulated interests, can be strengthened. Increased independence has to be balanced
with a clear framework for accountability. Powers of regulatory authorities have to be
consolidated through increased investigative capacities and a clear differentiation of tasks
with line ministries. All regulatory authorities should build strong legal departments.
The functions of some regulators may need clarification, particularly in the water sector.
Effective competition in the electricity, telecommunications and financial sectors could
be strengthened. More systematic agreements and co-operation with the competition
authority could improve the situation. The goal should be to provide opportunities for
mandatory bilateral public consultation with the sectoral regulators.
Strong consumer associations and the involvement of civil society should be
encouraged to participate in consultation with regulatory authorities.
Electricity sector
Whether or not reform opens the market to direct competition, CFE and LFC governance
and financing should be thoroughly reviewed: they should have greater management
autonomy and their budgets should be distanced from the State budget.
The current aprovechamiento system should be replaced by a new, transparent and
separate system for the direct financing of subsidies should be put in place. If the aim is to
help the poorest consumers, subsidies should be clearly focused on them.
These changes, however, need to go hand-in-hand with stronger regulation. Reform
should seek to ensure that CRE has adequate powers, independence and resources for its
work, and the relative merits of SENER and SHCP as its oversight ministry need to be
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carefully weighed up. There are potential conflicts between the government’s roles as owner
and as regulator which should be kept separate as far as possible. Competitive neutrality will
benefit competition and efficiency in the energy sector. The CFC has already been active in
promoting competition in the energy sector within its current jurisdiction, limited by the
existence of strategic areas and its non binding opinions, by fighting anticompetitive
conducts, participating in the design of proposed new regulations and evaluating prospective
participants in auctions to allocate CFE’s contracts for power generation. Competitive
neutrality will benefit competition and efficiency in the energy sector.
Other issues that need attention include a review of natural gas market regulation to
ensure that the downstream market for gas is operation efficiently, and to promote the
development of Mexico’s own natural gas reserves. Natural gas is the key input for new
power generation in Mexico, and investors will consider its cost in making their decisions.
The place of current private participants in a reformed market needs to be clear, to avoid
investor uncertainty. The regulatory framework for infrastructure sitting needs to be
straightforward, to avoid holding up new investment.
An effective and comprehensive communication strategy is a necessary component to
reform. This should include an open and transparent process for the design and
implementation of reform, appropriate stakeholder consultation, strong government
outreach to the public, and appropriate transitional arrangements.
Notes
1. A new bankruptcy law was enacted in 2000 in line with international standards. Ley de Concursos
Mercantiles.
2. Mandatory technical requirements are called Mexican official standards (Normas Oficiales
Mexicanas, NOMs).
3. Voluntary standards are called Mexican standards (Normas Mexicanas, NMXs).
4. OECD (2004), OECD Mexico Economic Survey, Paris.
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OECD Reviews of Regulatory Reform: Mexico
Progress in Implementing Regulatory Reform
© OECD 2004
Chapter 2
Government Capacity to Assure
High Quality Regulation
This chapter discusses recent developments of market openness policies that have
taken place since the 1999 Review on Regulatory Reform. The chapter provides
an assessment of the implementation of past policy recommendations, reporting
progress made in promoting a free trade and investment environment and identifies
new challenges.
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Introduction
Mexico has made significant progress in improving its regulatory system and tools in
recent years, which puts it in the forefront among Latin American and well-advanced
OECD countries. Market-oriented regulatory policies and related instruments have been
strengthened since 2000 with the enactment and amendments of different laws and the
creation of new institutions. Mexico is undertaking a major transformation of its regulatory
approach in a more democratic and transparent political framework.
The main goal of the Monitoring Exercise is to show how Mexico has tackled the
recommendations made by the OECD, published in 1999 in the OECD Review of Regulatory
Reform in Mexico (hereafter “1999 Report”). The analysis of the extensive changes introduced
to regulatory and governance arrangements in Mexico, as well as the new trends in
regulatory policy, provide a starting point for discussion, since much has changed in a very
short period of time. After the analysis of the main trends of regulatory policy in Mexico, an
assessment of the implementation of the recommendations will be given. The aim of
the chapter is not only to highlight the elements of success, but also to point out the
shortcomings of the process: what can be achieved in the present administration and what
can be started now with long-term benefits for the Mexican society. The identification of
strengths of the programme, as well as remaining gaps and challenges to be addressed will
be part of the policy option section.
The scope of the reforms and the current trends of the regulatory system in Mexico
were highly influenced by the OECD recommendations of the 1999 Report. Since its
conception in the early 1990s, Mexican regulatory policy has tried to move closer to best
practices on regulatory reform applied in OECD countries. The 1999 Report pointed out
some of the weakness of the process to assure high quality regulation, recommending
moving forward in key areas (see Annex A). These recommendations covered a very broad
range of regulatory aspects, tending to improve high-quality regulation for government
effectiveness. In the Mexican case, key elements were successfully put in place and
implemented as a direct result of a strong commitment at the highest political level.
Regulatory policy became an important tool to adapt the economy to the
transformations that structural reforms required. In 1999, Mexico had recovered from the
financial crisis that had hit the country in 1994-95, undertaking a deep economic
transition: trade and price liberalisation was in place; privatisation was extended to most
state-owned enterprises; competition policy was promoted across the economy;
deregulation was introduced to reduce rigidities of the national economy. The economic
strategy achieved the goal to create the basis for a non-inflationary growth: the link
between devaluation, inflation and higher public sectors deficits, which had affected the
country recurrently, was broken. Private investor confidence led to the increase of inflows
into financial markets, mainly due to the openness of the economy and the structural
reforms implemented. Despite these achievements, Mexico was facing considerable
problems: economic growth was not sufficient to absorb a growing labour force; the
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amount of credit to the private sector was limited, and regional disparities increased as
positive economic results were not shared equally by all social groups. In addition, serious
economic imbalances and challenges remain in a number of sectors, such as access to
credit or banking services, telecommunications, energy capacity or availability of water.
Regulatory policies
The election of a new administration in 2000 transformed the political landscape. The
presidential victory of the Partido Acción Nacional (PAN) put an end to the de facto one-party
system, dominated by the Partido Revolucionario Institucional (PRI), which was in power for
more than 70 years. A pluralistic democracy was already manifest in the 1990s at the state
level. Mexico moved forward a more open political system, reducing a centralist tradition
in the decision making-process. Federal elections in 2003 confirmed this trend, opening a
new stage for co-operation and conflict among powers, with a “horizontal” division of
powers, as the federal Executive no longer enjoys a political majority in Congress, and a
“vertical” division of powers across levels of government.
In this political framework, the restructuring of the public administration in Mexico
remains a fundamental step to strengthen modernisation and decentralisation. Even if this
reform is a cornerstone of the current government and the need for a more transparent,
responsive and accountable public administration has been explicitly recognised in the
National Development Plan1 (Plan Nacional de Desarrollo 2001-06 – PND), the Mexican public
administration system still requires significant changes.2 The historical merger of political
and administrative elites previously frustrated the attempts to reform the administrative
system. The lack of a high-level career civil service confers large discretionary powers
to the president.3 The mobility of public servants is hindered by a well-entrenched
bureaucracy facing a highly complex decision-making process, some duplication of tasks,
overlapping of functions and an often fragmented co-ordination among ministries.
Mexico’s legal environment can still be improved to deliver good policy results. The
legalistic structure of the whole system contributes to a rigid administration which hinders
effectiveness, but relies sometimes on the discretion of authorities to exercise its powers.
In a new political environment, these features are challenged, as well as the relative
harmony that they used to provide: tensions among the separate branches of government,
a strengthening of federalism, as well as a less powerful executive, all of which are normal
in many democracies and especially in large countries, undoubtedly will impact on the
regulatory reform process.
The Regulatory Improvement Programme
Regulatory policy has remained a high priority of the Mexican government,
accompanying the process of structural reforms. The administration of President Fox
recognises the explicit goal of achieving a “government with regulatory reform”. 4
Nevertheless, it was at the end of the administration of President Zedillo that major
changes to the institutional framework for the regulatory reform in Mexico started
being introduced. In March 2000, the Mexican Congress approved reforms to the Federal
Administrative Procedure Law (Ley Federal de Procedimiento Administrativo – LFPA), in order to
institutionalise a regulatory improvement system. The reforms were published in the
Federal Official Gazette (Diario Oficial de la Federación) in April 2000, extending the scope of
regulatory improvement policy, as recommended in the 1999 Report.
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These reforms applied not only to substantive laws and lower-level rules that involve
business formalities and regulations, but also to those imposed to citizens. Areas such as
federal public procurement and public works, social security and technical standards were
included in the scope of the law. The programme also established a clearly defined scheme
for the review of all regulatory activities of all ministries; regulatory agencies, such as the
Regulatory Energy Commission (Comisión Reguladora de Energía – CRE) or the Federal
Telecommunications Commission (Comisión Federal de Telecomunicaciones – COFETEL) and
decentralised bodies, such as the Mexican oil company (Petróleos Mexicanos – PEMEX), the
Federal Electricity Commission (Comisión Federal de Electricidad – CFE) or the Mexican
Institute of Social Security (Instituto Mexicano del Seguro Social – IMSS). Procedural
requirements were extended beyond federal ministries to decentralised agencies, with
respect to their acts of authority and services they provide on an exclusive basis, and to
asymmetric regulation of dominant firms. The LFPA also replaced the Agreement for the
Deregulation of Business Activity (Acuerdo para la Desregulación de la Actividad Empresarial)
of 1995, as the main legal document supporting the regulatory programme.
The reforms to the LFPA have consolidated a system of regulatory management,
moving away from an ad hoc deregulation model. This trend has been reinforced at the
highest political level, as recommended in the 1997 OECD Report on Regulatory Reform:5 the
regulatory policy in Mexico is part of the National Development Plan 2001-06, which led to
the publication of the Regulatory Improvement Programme 2001-06 (Programa de Mejora
Regulatoria 2001-06) in the Official Gazette in January 2002. The LFPA created the Federal
Regulatory Improvement Commission (Comisión Federal de Mejora Regulatoria – COFEMER),
which is in charge of the implementation of this Programme of the Mexican government.
The Programme sets the following strategies as main components of the federal
government’s activities in the administration and reform of regulations:
●
To elaborate two-year improvement programmes of high quality.
●
To conform, streamline, actualise and maintain publicly available the electronic system
of federal formalities and services (Federal Registry of Formalities and Services – RFTS).
●
To review and improve drafts of legislative and administrative regulations that imply
costs to enterprises and private agents.
●
To promote the incorporation of good regulatory practices in the federal public
administration.
●
To analyse and to propose drafts of regulations in order to improve the regulatory
framework of specific economic sectors and regulatory areas.
●
To deepen the collaboration and technical support about regulatory improvement
process on the three government levels.
Assessment
The OECD recommended Mexico in 1999 to close gaps on government-wide standards
for regulatory quality, to eliminate exemptions in the current policy framework and to
expand the review programme beyond “business” regulations to all significant regulations.
Even if the LFPA has increased the scope of the regulatory reform, the law still maintain
some exemptions, particularly on regulations related to contributions (taxes and payments
made to the federal government), public servant obligations, agrarian and labour justice
and those established by the Prosecution and the Ministries of Defense and Marine. The
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gaps on fiscal issues, particularly, are an issue of concern, since a complicated fiscal
system remains a burden for business activity and imposes unnecessary complications to
citizens. This issue will be discussed in section Policy options.
The Biennial Programmes
Ministries and decentralised organisms are also carrying out the Regulatory
Improvement Programme. The LFPA enforces Ministries to designate an Undersecretary (or
equivalent) responsible for regulatory reform (responsable oficial). This person is in charge of
promoting and co-ordinating regulatory reform within his ministry or decentralised
organism, submitting the proposed regulations and their regulatory impact assessments to
the COFEMER, and also of presenting a regulatory improvement programme to the
COFEMER every two years (programas bienales). The Biennial Programmes of each Ministry
include a list of potential regulations that Ministries and decentralised organisms may
submit to COFEMER the following two years. In terms of administrative regulation, the
Biennial Programmes include two main elements:
●
A list of normative regulations, including objectives and justifications that need to be
issued, reformed, repealed or abrogated during the term of the Programmes.
●
A list of official technical regulations (Normas Oficiales Mexicanas – NOMs) that according
to Article 51 of the Federal Law on Metrology and Standardisation (Ley Federal sobre
Metrología y Normalización – LFMN) are under revision after the five years of validity.
In terms of regulatory drafts and the creation, modification or elimination of
formalities, the 2003-05 Biennial Programmes consist of:
●
Federal Registry of Formalities and Services’ content validation: the ministries have to
validate and include all the formalities that are specified by laws and reglamentos in the RFTS.
●
Review and migration process of formalities: the purpose of this review process is based
on the fact that: i) many formalities lack a clear legal basis; and ii) the information
quality of some formalities is deficient. During the migration process all formalities are
transferred to a new clearer format.
●
Identification of high impact formalities: ministries and decentralised agencies have to
identify a maximum of three formalities that either: i) have significant effects on the
population; ii) are most frequently used; or iii) imply high costs for a specific sector. At
the same time, ministries have to propose a plan for the improvement of their impact
formalities.
These objectives aim at creating an internal responsibility in each regulatory agency,
establishing a discipline relating to the presentation and evaluation of activities of
regulatory policy, which is fundamental for tracking the reform inside the administration.
Co-ordination between levels of government
Since 1997, when the PRI lost a majority in the federal Congress, Mexico has experienced
a political competition process that has led to a new thinking of federalism: many states and
municipalities, which are now governed by opposition parties, are asking for a more active
role in the decision-making process. Nevertheless, a historical centralist tradition remains a
challenge to those who promote the benefits of increased decentralisation and competition
at all levels.
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Regulatory responsibilities in Mexico are shared among federal, state and municipal
levels of government. A cornerstone topic in the relation with states and municipalities has
been the overlaps, duplication and inconsistency with federal regulations. This fact has been
recognised by COFEMER, integrating in its main activities the assistance to states and
municipalities to improve their respective regulatory programmes. COFEMER has signed coordination agreements (convenios marco), with twenty-eight (out of 31) states, in which the
states agreed to implement regulatory improvement programmes similar to the one at the
federal level. These agreements are negotiated at the highest political level, which is
fundamental for the coherence of the mechanism. COFEMER has also signed co-operation
agreements with sixteen municipalities, in order to attain an efficient and complementary
regulatory framework in and across all three levels of government. In some cases, state laws
containing regulatory policies have been enacted, like the Law of Regulatory Reform for the
State of Puebla, in November 2002, the first for a state at national level. As part of the
technical assistance provided by COFEMER, the Commission has prepared municipal guides
on regulatory reform that take local governments through the process of establishing an
independent regulatory review authority, creating a Registry of Business Formalities,
including RIA and designing effective enforcement schemes.
In order to strengthen the co-ordination between levels of government with a more
focused programme, COFEMER designed the System for Rapid Business Opening (Sistema de
Apertura Rápida de Empresas – SARE). The main rationale of the SARE is the analysis of the
costs related to the start-up of businesses (see Table 2.1). Empirical data show that the
average time needed in Mexico is 57 days,6 which is related not only to formalities at
federal level, but to important regulations imposed by state and municipal authorities,
such as land use permits (uso de suelo) and licenses (licencias de funcionamiento). The SARE
was prepared by COFEMER, at first instance, for the federal level (federal formalities). The
system was issued by presidential agreement in January 2002, allowing businesses in
685 low risk economic activities, which represent 55% of the total classified business
activities and 80% of activities carried out by SMEs, to complete just two federal formalities
in one business day to start operations. These two federal formalities refer to the fiscal
identification number and name registration. The remaining federal formalities, such as
social security obligations, can be complied three months later of initial registration.
Table 2.1. Start up a business
International comparison
Number of formalities
Australia
Days
Initial cost (USD)
2
3
402
Brazil
15
152
331
China
135
11
46
Denmark
4
4
0
United States
5
4
210
Mexico
7
57
1 110
Singapour
7
8
248
Source: CEESP (2003).
An important issue for SARE’s success refers to local formalities. Businesses must also
comply with state and municipal formalities. Therefore, the federal government is
co-ordinating efforts in order to develop compatible systems at the state and local levels. The
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SARE has been an important tool to reduce regulatory burden at these levels, since the
creation of a one-stop-shop has simplified and tried to harmonise the administrative
formalities that citizens face when they want to set up a micro, small and medium enterprise
(see Table 2.2). In order to achieve this goal, the SARE required the co-ordination and
agreement between different Ministries, e.g. Finance, Health, Foreign Affairs, Environment
and Public Administration, as well as the involvement of state and municipal authorities.
Table 2.2. Number of days and formalities required to start-up a business
Selected municipalities participating in SARE
Municipality
Puebla
Days
Before SARE
With SARE
Los Cabos
Before SARE
With SARE
Aguascalientes
Guadalajara
Tlalnepantla
27
5
2
5
1
35
16
10
5
1
7
6
With SARE
1
2-51
1
Before SARE
2
0-3
2
2
1
15 minutes
Before SARE
3
With SARE
1
1
1
20
3
3
1
1
42
6
6
3
3
2
15-30
5
4
1
3
1
Before SARE
Before SARE
With SARE
Chetumal
58
1
With SARE
Oaxaca
Visits to offices
29
Before SARE
With SARE
Zapopan
Formalities
Before SARE
With SARE
15 minutes
Variable
3
Source: Coordinación de Enlace con Estados y Municipios, COFEMER, February 2004.
Assessment
COFEMER has strengthened its relations with state and municipal governments, in order
to attain an efficient and complementary regulatory framework in and across all levels of
government. Most of the 31 federal states have signed co-operation agreements with the
Commission, but still very few municipalities have followed this path. The political diversity at
different level of governments, increased since 1997, has not impeded the efforts to spread the
regulatory improvement programme. COFEMER has been able to negotiate with governments
constituted by different political parties the set up of institutions and the introduction of
regulatory tools. This trend shows how regulatory improvements could be extended across the
country. Nevertheless, regulatory reform has not been implemented as a local policy in every
state: while some of them have adopted it as a key policy issue, others do not see it as a priority.
Since the SARE is a cornerstone for multi-level regulation in Mexico, the results of
SARE are of great importance. They can be analysed from different perspectives. The SARE
has an impact on the economic activity. Data gathered by COFEMER in those years of
implementation show that SARE has contributed to incentive the start-up of businesses.
Micro, small and medium enterprises have taken advantage of the reduction of red tape,
creating employment and generating investment (see Table 2.3). The SARE appears as a
good tool to attract those people who are in the informal sector and integrate them into the
formal economic activities. Some municipalities give direct incentives to those who want
to regularise their situation, e.g. reduction of fines, grant of the license, elimination of extra
charges due to the informality, etc.
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Table 2.3. Economic impact of SARE in selected municipalities
City
Opened businesses
Puebla
Los Cabos
Aguascalientes
Guadalajara
Investment (pesos)
Employment
SARE started on
3 769
$38 745 000
8 511
May 8, 2002
659
$69 382 500
1 125
October 16, 2002
447
$25 000 800
683
April 10, 2003
5 024
$150 711 197
7 961
May 28, 2003
Zapopan
625
NR
3 438
May 28, 2003
Tijuana
38
$303 348
48
June 2, 2003
June 2, 2003
Mexicali
25
$1 155 000
30
110
$19 845 500
369
1 192
$156 396 720
8 157
Tehuacan
45
$255 380
27
Oaxaca
25
$692 000
25
December 8, 2003
Cancún
1
1
December 12, 2003
León
Tlalnepantla
Total
11 960
$462 487 445
July 1, 2003
September 8, 2003
October 1, 2003
30 375
Source: Coordinación de Enlace con Estados y Municipios, COFEMER, December 2003.
On the other hand, the SARE has intrinsic limitations and needs to be complemented
with other policies. Even if improvements at the state and local level have been achieved, in
particular due to the institutionalisation of the regulatory improvement programmes and
the creation of one-stop shops, more needs to be done in order to expand the SARE to other
cities and strengthen co-operation with other institutions to reduce the costs of formalities.
The OECD also recommended in 1999 to review and reform the sub-national regulatory
framework associated with the supply of private local infrastructure. Despite the
achievements in the co-ordination front, the provision of goods and services by states and
municipalities remains a key issue to address, since local regulatory frameworks for private
concessions and government procurement are still weak. COFEMER has not been able to
tackle this issue because the supply of private local infrastructure is a mainly municipal
activity. This would require further interaction between states and municipalities.
Regulatory institutions
COFEMER and the Regulatory Improvement Council
A major achievement of the reforms to the LFPA was the creation of the Federal Regulatory
Improvement Commission (COFEMER), which replaced the former Economic Deregulation
Unit (Unidad de Desregulación Económica – UDE), which had been created in 1989 as part of the
Ministry of Trade and Industry (Secretaría de Comercio y Fomento Industrial – SECOFI), today
Ministry of Economy (Secretaría de Economía). COFEMER was conceived as a technically and
administratively independent organism of the Ministry of Economy, for co-ordination and
supervision of the regulatory improvement programme of the government.
COFEMER’s mandate is to ensure transparency in the drafting of federal regulations
and to promote the development of cost effective regulations that produce the greatest net
benefit for society. COFEMER’s approach to regulatory reform is based on its mandate and
encompasses four main activities:
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●
Elimination and simplification of business and citizen formalities.
●
Transparent and analytical review of all draft regulations and their regulatory impact
assessments.
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●
Diagnosis of and proposals to reform existing laws and regulations in specific areas or
economic sectors.
●
Support for state and municipal regulatory improvement programmes.
The Regulatory Improvement Programme is designed and co-coordinated by
COFEMER, supported by the Federal Regulatory Improvement Council (Consejo para la
Mejora Regulatoria Federal), whose membership was also modified by the LFPA. The
president of the Council is the Minister of Economy and other members are the Minister of
Finance, the Minister of Labour, the Minister of Public Administration (former ComptrollerGeneral and Vice-president of the Council), the General Director of COFEMER, the Governor
of the Bank of Mexico, five business sector representatives and at least one representative
from the labour, agricultural and academic sector. The President’s Legal Counsel, the
President of the Federal Competition Commission (Comisión Federal de Competencia – CFC)
and the President of the Federal Consumer Protection Agency (Procuraduría Federal del
Consumidor – PROFECO) are new members since 2000. As such this Council mirrors the
experience of other OECD countries, involving labour and business representatives in
official advisory bodies to the government for regulatory matters.
The Council meets approximately four times per year and gives direction to COFEMER.
President Fox has chaired the four meetings of the Council, backing up the whole process.
This forum also allows the business sector to express its concerns on regulatory issues.
In the last meeting of the Council, in April 2004, President Fox announced a moratorium
for one year on regulations as part of an effort to reduce burdens in businesses (see
Box 2.1). Furthermore, the government established in 2002 a Presidential Council for
Competitiveness (Consejo Presidencial para la Competitividad), in order to foster and
consolidate the competitiveness of the Mexican industry. Private agents can liaise with
different Ministries and other agents from the social sectors, analysing concrete structural
and sector-focused strategies to increase competitiveness. The set up of a sound regulatory
framework and administrative simplification have been recognised as key strategies to
Box 2.1. Regulatory moratorium in Mexico
The Presidential Decree that establishes a regulatory moratorium was published the
12th of May, 2004. The Decree entered into force the next day and restricts the emission of
new regulation until the 29th of April, 2005. It also forces federal agencies to conduct, in
conjunction with the COFEMER, a review of existing regulations. The moratorium does not
apply to certain limited categories of regulations, including those that respond to
situations posing an imminent danger to human health or safety, promote ordered
economic growth and protect natural resources.
The purpose of the moratorium is to order and to prioritise government’s regulatory
activity. Due to the fact that entrepreneurs are important promoters of many regulations,
President Fox invited them, their organisations, chambers and associations to collaborate
with this effort. The government and the private sector are working on establishing an
agreement which will define the way how private sector requests of regulation will flow.
The regulatory moratorium aims at reinforcing Mexico’s competitive position. The
purpose is to transform the Mexican business environment, by promoting competition and
competitiveness, making regulation transparent and strengthening the rule of law.
Source: COFEMER.
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develop further. This Council for Competitiveness reports directly to the Cabinet of Growth
with Quality and the Office of Public Policies, attached to the Presidency.
Within this framework, COFEMER has become a driving force for regulatory reform
in the country, overcoming some of the limitations of the UDE. With a budget of
approximately 5 million dollars per year, COFEMER is staffed by 69 employees, of which 60
are professionals (mostly economists, lawyers and industrial or computer engineers). It is
headed by a General Director, directly appointed by the Mexican President and who has the
right to organise the structure and functioning of the Commission.
Assessment
The OECD recommended Mexico in 1999 to transfer the UDE to a location at the centre
of government, in order to exploit government-wide policy and management authorities and
to improve co-ordination and consistency in reform efforts. The 1997 OECD Report on
Regulatory Reform recommended that governments “create effective and credible
mechanisms inside the government for managing and co-ordinating regulation and its
reform”. Oversight bodies that work as “engine of reform” vary according their capacities and
institutional design, but the OECD experience shows that regulatory oversight bodies are
most effective if they maintain consistency and systematic approaches across the entire
administration to provide broad-based and credible results. At the administrative level,
many OECD countries have located strong central oversight bodies close to the centre of
government to enhance their effectiveness.
The addition of a third title to the LFPA in 2000 allowed the creation of a technically
and functionally autonomous body, the COFEMER, under the leadership of the Ministry of
Economy.7 Moving regulatory management and policy from a line ministry to the centre of
government, like Presidencia or the Ministry of Finance, was discussed during the debate
around the LFPA, but the idea was not approved by Congress. The possibility of creating
COFEMER as a completely independent decentralised or constitutionally autonomous
agency was also contemplated, but ultimately discarded by legislators, who opted to leave
the COFEMER under the umbrella of the Ministry of Economy (former Trade and Industry)
because of the nature of its duties.8
In the Mexican case, the regulatory system and mechanisms improved considerably with
the establishment of COFEMER, which was empowered by law to conduct a more consistent,
coherent and forward-looking approach to regulatory reform. While COFEMER is the expert
administrative institution and the Regulatory Improvement Council is the political body in
charge of co-ordinating and promoting the regulatory reform, the LFPA has also improved
co-operation with Ministries and decentralised organisms of the Mexican administration. Most
important, COFEMER has put into place a system of measuring regulatory quality (described in
section Regulatory tools and procedures), investing in specialised expertise in regulatory reform
and transparency in the development of regulations.
Nevertheless and notwithstanding the monitoring authority of COFEMER through RIA,
the Ministry of Economy has no authority over other ministries. COFEMER has faced the
resistance of entrenched vested interests, particularly within the public administration.
Co-ordination and dialogue with other Ministries and decentralised bodies are still
required in order to extend a cultural change among regulators and develop a more
transparent, results-oriented and accountable way of operating the regulatory
improvement system. The reinforcement of the relationship between the COFEMER and
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the Ministry of Public Administration (Secretaría de la Función Pública, former Comptroller
General) can provide a better co-ordination between public management reform and
performance management of the public sector.
The location of COFEMER in the Ministry of Economy can be understood as a sign that, in
the past, regulatory policy was considered primarily a matter of improving the business
environment by removing unnecessary and excessive regulation. The development of
COFEMER’s tasks and role has shown, however, that the focus has shifted to a broad
conception of regulatory quality and to a more dynamic approach to regulatory management.
Building regulatory agencies
As in other OECD countries, so called “independent regulators or autonomous
administrative agencies with regulatory powers” have emerged in the Mexican
institutional landscape. Analysis of specific regulators will be subject of Chapter 4. It is
important to note at this stage that this institutional setting offers great potential in
improving regulatory quality and efficiency. The institutional design of independent
regulators in Mexico has not followed a common pattern. Because of this lack of coherent
framework, the regulatory powers of regulators vary in scope and scale.
COFEMER has undertaken some periodical diagnosis of this situation. As a result, legal
gaps and political bottlenecks have been identified and tried to be solved through concrete
administrative and legal reforms. A good example of this involvement was the drafting of
the Law of Transparency and Access to Information (Ley de Transparencia y Acceso a la
Información Pública Gubernamental) and the creation of the Federal Institute for Public Access
Information (Instituto Federal de Acceso a la Información Pública – IFAI).
Regulating access to information: a new law, a new body
The Law of Transparency, approved by Congress in April 2002, represents an important
effort to increase transparency within the public administration, especially regarding the
access to information and the analysis about the use, distribution and destination of public
resources. COFEMER, the Ministry of Public Administration and of Interior as well as other
important actors, such as members of the Parliament, intellectuals and academics,
participated in the elaboration and negotiation of the law. The Congress revised different
proposals and was able to issue a final law unanimously. The Transparency Law entered
into effect in June 2003 to guarantee people’s access to Federal Government’s documents
and records.
The Transparency Law recognises three types of information:
●
Public information,i.e. government information or public servants’ information that must
be published and can be accessed by request.
●
Classified information,i.e. government or public information that is in a temporary
embargo from publicity, up to 12 years, like if it could affect national security or defense,
international negotiations before agreement is reached, severe effects on economic or
financial stability, if imperils life, safety or health of any person or if law enforcement or
justice could be obstructed.
●
Confidential information, which does not belong to the government, i.e. individuals’ and
private entities’ right of privacy and secrets, like industrial, fiscal and banking.
The Transparency Law includes also “transparency obligations” for agencies that have
to report in their Web pages, updating them periodically, up 16 information themes. The
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list includes: directory of public officials, salaries, payroll and fringe benefits; subsidies
(amount and name of beneficiaries); government bids and contracts; government permits,
concessions, licenses, etc. The transparency on financial issues represents a move ahead
of many other OECD countries.
To oversee compliance of the Transparency Law, the Mexican government created the
Federal Institute for Access to Public Information (IFAI) in 2003. The main goals of the IFAI are
to guarantee the effectiveness of both the right to access public information and the right to
privacy through data protection and to promote transparency and public sector accountability.
The structure of the IFAI differs significantly from the structure adopted for other regulatory
agencies (for “organismos desconcentrados” see Chapter 4) as it is neither subordinated to the
Presidency nor any Ministry. It also has autonomy in its decisions regarding compliance with
access to public records and has competency over the federal agencies of the Executive branch.
The budget, provided by the Ministry of Finance, has to be approved by Congress; the IFAI has
an internal auditor. The IFAI is directed by a Board of five Commissioners, who are proposed by
the President and ratified by the Senate, which might refuse them, but not propose new ones.
They are appointed for a 7 year fixed-term. They elect a Chairman among themselves every
two years. The legal faculties of the IFAI are the following:
●
Definitiveness of resolutions. Final decisions taken by the IFAI are definitive and the
agencies are obligated to comply with them.
●
Unrestricted access. The IFAI has legal capacity to request from an agency or institution
any classified, reserved or confidential information to analyse whether or not it can be
disclosed.
●
Recommend sanctions to non-complying officials. If a public officer does not comply
with the Transparency Law, he/she might face administrative or legal sanctions.
●
Issue rules and oversee agencies. Design and issue rules and systems mandatory for
agencies.
Unlike other OECD countries that have such an institution, the IFAI works with clear
principles of costs: public information is free in nature, the cost of generating and
retrieving it has been already covered by tax-payers. The only costs that can be asked
for are the materials used to reproduce and the cost of delivering it to applicants. If
information flows through the Internet, it bears no cost of reproduction materials and no
cost of delivery. However, this generous feature might have to take into account the
opportunity cost of public administrations in delivering the information in the future.
The IFAI has developed an electronic system called SISI, which manages all steps of
an information request. The SISI has proved to be a useful tool: from June 2003 to
January 2004, there have been more than 27 000 information requests; 93% of them have
been made through the SISI.
The procedure to access the information is the following: the citizen presents the
request and the concerned institution has 20 working days to reply. If the information is
public, it has to make it available in the following 10 working days. If the information is
denied or incomplete, the citizen has the right to present an appeal to the IFAI, which has
the legal authority to determine whether or not the government must disclose the
information, within 15 working days after denial by mail or through the SISI. The appeal
can be discarded as inadmissible or accepted by the IFAI to be analysed. In this case,
both the applicant and the agency present their arguments before one of the IFAI’s
Commissioners, who analyses the case and presents a draft solution before the Board
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within 30 working days. The Board issues a final resolution over the appeal in the coming
20 working days. As of January 2004, almost 700 appeals have been presented and
approximately 600 of them have been resolved. The resolutions have given access to the
information in 86% of the cases and confirming the no-access in only 14%.
Regulatory tools and procedures
Transparency is a key element of the regulatory process. Mexico has moved forward in
increasing transparency in the design of new regulation, in particular through the RIA process
and the strong role of COFEMER during the process. Excessive discretionary power during the
making of new regulation has decreased and public officials have to be more accountable for
its decisions and actions. Nevertheless, the reforms of the judicial system, as well as the
implementation of the amparo process remain issues to be tackled in the future.
Transparency and predictability
Transparency in implementation of regulation: forward planning of regulatory
actions
Mexico has included in its Regulatory Improvement Programme a mechanism to
describe future regulations. The Biennial Programmes, described in section The Biennial
Programmes, give a clear forward-looking approach to new regulations. The process works as
follows: One or two months before the previous two-year programmes are completely
executed, COFEMER submits to every regulatory agency a manual for elaborating the new
regulatory programmes. This manual contains the new outlines that every programme must
include, to be published in the Official Gazette, such as: a list of the formalities that will be
created, eliminated or streamlined, a list of high impact formalities to be streamlined, and a
list of federal regulations that will be created, modified or cancelled (including laws, lower
level rules, decrees, technical standards, etc.). Each regulatory agency prepares a first draft
which is submitted to COFEMER, which then is posted for public comments on COFEMER’s
Web site (www.cofemer.gob.mx) for at least thirty days. After the period of public consultation,
COFEMER sends to each ministry and decentralised agency its own comments to the
programmes as well as public comments received. Each regulatory agency then makes any
corresponding changes to its programme or explains the reason to reject them, and then
publishes the final version in the Official Gazette within a month. Every six months each
agency must submit to COFEMER a report on compliance with the programme and possible
modifications to the programmes are assessed.
The importance of the two-year regulatory programmes lies in the fact that every
regulatory agency institutes a discipline of periodical review and planning of the regulatory
framework and its amendments. The regulatory programmes help to achieve the central
purpose of the federal regulatory improvement policy: to create and to modify regulations
and formalities according to processes based on planning, transparency, analysis of
potential effects, and public consultancy, in order to obtain the highest social benefit.
Another major instrument of forward planning is the National Standardisation Plan
(Programa Nacional de Normalización), which is published in the Official Gazette at the
beginning of every year (see Chapter 3 on Market Openness, in section Reducing the costs of
regulatory diversity, for details). This document contains all planned activities relating to
technical standards, both mandatory technical regulations (NOMs) and voluntary Mexican
standards (NMXs): new standards to be proposed, modifications to existing standards,
elimination of standards, and the results of the five year review mandated by the Federal Law
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on Metrology and Standards (Ley Federal sobre Metrología y Normalización). Items not included
in the Programme cannot be presented to the national consultative standardisation
committees for review or approval, except in the case of emergency standards.
Transparency as dialogue with affected groups: use of public consultation
Consultation in making, modifying or repealing legislation and regulation in Mexico is
still weak. There is no legal obligation for undertaking active public consultation for
federal regulatory proposals subject to the Third Title of the LFPA, with the exception of
technical standards, stipulated by the Federal Metrology and Standards Law. Nevertheless,
COFEMER has included a section in the RIA questionnaire concerning public consultation.
Institutional bodies are requested to specify if they established some type of public
consultation and who was consulted about the proposals. The RIA also requests to list all
the proposals that were taking into account for the draft regulation that is being presented.
Even if there is still a gap on general consultation requirements, all draft federal
regulations are bound by the LFPA to be publicly available at least thirty working days
before they are issued or sent to the President’s legal counsel. However, by virtue of the
Transparency Law all draft federal regulations must be available for public comment at
least twenty working days. This is an important step in opening up the decision-making
process for regulations because it imposes minimum disciplines as to how long proposed
regulations are available to the public. This rule has contributed to shield COFEMER
from political pressures, since its final opinions do not need to be hastily issued and the
proposals that are not published for comment on the Internet for at least twenty working
days are in violation of the Law. The regulatory agencies can comply with this obligation by
making regulatory proposals publicly available through COFEMER’s Web site, as COFEMER
certifies such compliance after the required twenty days period elapses. Thus, the LFPA
and the Transparency Law require that proposals and their RIAs are published and made
available to the public on the Internet, and that COFEMER takes all public comments
received into consideration, but they do not require ministries to undertake active
consultation processes, like fora, sending proposals to certain parties, etc.
Transparency in implementation of regulation: law drafting
COFEMER, through the improvement of the RIA mechanism (see below in section
Understanding regulatory effects: the use of Regulatory Impact Analysis), has contributed to
improving law drafting quality. In practice, and because of this type of legal quality review,
COFEMER also serves as an important filter of deficient regulation before it reaches the
President’s legal counsel (this applies to the most important secondary regulations,
including reglamentos and laws, and certain acuerdos). The RIA includes a section which
refers to legal analysis. This section contains several questions regarding legal foundation
and the effects of the proposed regulation on the regulatory framework. Therefore, the
review of the RIAs operates as a legal quality control; many of the partial or final options of
COFEMER are focused on legal issues. This section of RIA allows COFEMER and any other
interested party to analyse whether the regulatory agency has legal basis to issue the draft
of regulation, whether it is consistent with higher regulations or whether it can be
elaborated as another legal instrument.
The President’s legal counsel also published in September 2003 guidelines on the
preparation of laws in the Official Gazette. Ministries and regulatory agencies must send
the drafts of laws and legislative regulations that will be approved by the Congress,
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accompanied by a RIA and the opinions prepared by the Ministry of Interior or by any other
agencies related to the subject of the draft. The President’s legal counsel, after a final
opinion of COFEMER, decides definitively if the draft is submitted to the President’s
consideration and, if it is the case, for his signature. These guidelines are meant as a tool
to enhance the quality of law drafting.
Assessment
The 1999 Review recommended improving regulatory clarity and simplicity through
better law drafting. Whenever a formality is registered in the Federal Registry of Formalities
and Services (see section Review and simplification measures: Keeping regulations up-to-date),
COFEMER takes into account the principle of plain language drafting. The result should be
reflected in administrative simplification and certainty for citizens. RIA process monitored
by COFEMER shows, however, that there is still progress to be made by Ministries and
federal agencies.
Transparency in implementation of regulation: communication, compliance
and enforcement
Communication
Communication mechanisms have been improved by the LFPA. According to the law
no ministry or regulatory agency can publish a regulation in the Official Gazette without
COFEMER’s final judgment. The LFPA stipulates severe sanctions for public servants that
could circumvent LFPA’s requirements for publishing regulatory proposals, such as removal
from post and one year suspension.
Most proposals and some information on regulations are available on-line from COFEMER
on a non-discriminatory basis to national and foreign parties, proving a growing demand from
a wide audience. Nevertheless, progress can still be made as some information on regulations,
such as public comments, additions and corrections to RIAs, preliminary and final opinions,
cannot be found on line. RIA and the Federal Registry of Formalities and Services are good
examples of the communication mechanisms used by COFEMER. Due to the establishment of
the new RIA electronic system, introduced in October 2001, full texts of most draft proposals
and RIAs are available on-line (www.cofemermir.org). This system facilitates the access to any
interested person or group to the proposals or regulations and RIAs.
Also all technical standards and published drafts of technical standards are available
from the Web site of the Ministry of Economy (www.economia.gob.mx). Technical standards
subject to the five-year review requirement that are intended to be ratified, modified or
cancelled are listed in the annual National Programme of Standardisation. This Programme
includes also the potential new technical standards or modifications to existing standards
that will be issued during the corresponding year. Furthermore, the requirements for
publishing technical standards include also those stipulated in the Federal Law on
Metrology and Standards. In order to publish the technical standard there is a detailed
mechanism that must be complied. In general terms, the requirements for publishing
technical standards are: a) publication of a draft of the technical for public consultation for
sixty days (the draft is subject to LFPA review process prior to its publication); b) the
Committee in charge of elaborating the technical standard must review all public
comments and incorporate pertinent ones; and c) publication of the response to all public
comments by the ministry responsible of the technical standard at least fifteen days prior
to the publication of the technical standard.
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Assessment
The OECD recommended improving transparency by extending legal requirements for
notice and comment procedures, already required for technical standards, to all ministries
and agencies during the development and revision of regulation. Procedures for openness
should be standardised for all advisory bodies. COFEMER has promptly followed this
recommendation, as all draft federal regulatory proposals are made public from the
moment in which they are sent to the Commission, at least 30 working days before they are
published or emitted. This was reinforced by the enactment of the Transparency Law
in 2002, which enforces to publicise, via Internet, all documents for a period of at least
twenty working days. These reforms have allowed Mexican citizens to comment on
regulatory issues before final decision, except for fiscal proceedings and those of the
Ministries of National Defense and Navy.
Enforcement and compliance
The issue of compliance and enforcement of regulations has received relatively little
attention until recent times, when regulators in OECD countries have recognised that a
systematic non-compliance is a clear indicator of the need for a major regulatory reform.
In that sense, the efficacy of regulations is highly linked to their degree of compliance.
Most OECD countries confront the need to set up effective controls on the application of
regulation, in order to achieve regulatory goals.
In the framework of the work carried out by COFEMER and unlike several other OECD
countries, Mexico considers within the RIA the availability of resources – budgetary and
administrative – that can back up the regulatory process, as a tool to ensure compliance of
the regulatory measure. A step forward in reform has been the inclusion of a specific
question that refers to public resources for effective enforcement. The regulatory agency is
required to answer what public resources are necessary to ensure compliance of the
regulation, if it will be necessary to realise inspection, verification or certification activities
and if the available resources for enforcement are sufficient to guarantee the compliance.
This innovative compliance-oriented regulatory design requires improvement, integrating
new tools for regulatory evaluation and analysis.
The Ministry of Public Administration (former Comptroller General) has also developed
some programmes to improve ethics and fight against corruption within the public sector, in
order to reduce discretionality of public servants in applying regulations. The Presidential
Agenda for Good Governance contains the initiatives proposed by the Executive, which are
also supported by the Interministerial Commission for Transparency and Fight against
Corruption. In terms of a general administrative procedure, people in firms may appeal
specific decisions to the administrative authority that makes them, and then to the
hierarchically superior administrative body. If a person believes that an administrative unit
has exceeded its authority or has not followed specific administrative procedures, he may
also place a complaint and request for review by the Ministry of Public Administration
(Comptroller General), and seek disciplinary action in terms of the Federal Law of Public
Servants’ Administrative Responsibilities (Ley Federal de Responsabilidades Administrativas de
los Servidores Públicos), published in the Official Gazette in 2002. This law aims at regulating
the public service, especially the obligations, responsibilities and administrative sanctions of
the public servants. Important elements of the law are the fight against corruption and the
increase of transparency and accountability in the public management.
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Compliance and enforcement of regulations are directly linked to the legal system.
The political transition in Mexico has exposed the limitations and inefficiencies of the
judicial system, which used to serve to political arrangements more than to preserve the
rule of the law. Vested interests that still oppose reforms challenge deeper transformations
which are required as political openness is reinforced and the society demands a more
effective judicial system. Even if there have been some initiatives to promote enforcement
and reduce the potential for discretion in decision making, strengthening of independence
and autonomy from the political arena is a pending issue for reform in the judicial branch.
This situation has affected the enforcement of regulations, whose implementation has
sometimes been delegated to lower level officials or not inspected and controlled by
authorities in a regular basis.
A more detailed analysis of the amparo process will be given in Chapter 4. Nevertheless,
it is important to point out that the use of the juicio de amparo, the habeas corpus petition to
the courts when a person deems that his constitutional rights have been violated, plays an
important role in the non-compliance of regulations. The amparo process, if it is approved by
the courts, suspends the implementation of an administrative decision. There is some
debate as to the balance of the costs and benefits of the amparo, as it has sometimes served
as an effective barrier to administrative actions. Often amparos are facilitated by poorly
designed laws and regulations.
One problem currently observed in Mexico is the universe of rules and regulations that
form the administrative legal system. The LFPA does not identify what is called a “general
administrative act”.9 The result implies a generalisation of rules and regulations that, in
another context, should be hierarchical, in order to identify their functions, features and
consequences. This generalisation has a negative impact on the compliance of regulations
because it is difficult to identify what kind of controls could be used to verify their
enforcement. In the same sense, decentralisation of legal faculties across the
administration is aggravated by this lack of systematisation, giving ministries and
decentralised bodies a broad room of maneuver in setting up regulations.
Understanding regulatory effects: the use of Regulatory Impact Analysis
Since the publication of the 1995 Recommendation of the Council of the OECD on
Improving the Quality of Government Regulation, the OECD has promoted Regulatory Impact
Analysis (RIA) in ensuring that the most efficient and effective policy options were chosen.
RIA is a tool that has to accompany the development, review and reform of regulations. In
OECD countries, the use of RIA has rapidly increased and many states apply it to primary
legislation, which has a positive impact on the regulatory quality. Whereas the design of the
RIA depends on cultural, political and institutional considerations, it is widely recognised
that RIA is a useful tool to improve the cost-effectiveness of regulatory decisions and to
reduce the number of low-quality and unnecessary regulations. RIA also helps improving
transparency of the decision-making process and enhancing public consultation.
Mexico integrated the use of RIA in the LFPA. One of the COFEMER’s main activities is
the review of regulatory proposals (legal measures of general application drafted by the
Executive branch) that impose compliance costs on private agents and their corresponding
RIAs, including a discussion of objectives, obligations to be imposed, alternatives
considered, potential costs and benefits, and the result of public consultation. This means
that absolutely all types of legal measures of general application that create compliance
costs, from formats to major implementing rules, must be submitted to COFEMER, except
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for the subjects that the law explicitly excludes, like those of fiscal nature, or acts by subfederal administrations, states or municipalities. Ministries and regulatory agencies are
responsible for elaborating RIAs, while COFEMER is responsible for reviewing them (see
Figure 2.1). Asymmetric regulations for dominant market participants, as determined by
the Federal Competition Commission (CFC), are also subject to RIA requirements and
review by COFEMER.
Figure 2.1. Draft regulations sent to COFEMER
2001-03
With RIA
Exemption requests
1 200
1 000
800
679
600
400
200
0
490
367
224
2001
333
408
2002
2003
Source: COFEMER, 2004.
Given the importance of RIA in the management of regulation and the pursuit of
regulatory quality in Mexico, it is worth providing some details about how it is prepared
and used. The Commission reviews both the draft and the RIA and has ten working days to
ask for corrections or addition information to the RIA, in case it lacks of substantial
information regarding market conditions, legal issues, unjustified obligations, potential
effects to the proposal, formalities, etc. The regulatory agency has to present again the RIA,
which must include the corrections or additional information requested by COFEMER.
Furthermore, if COFEMER considers that the proposal has important deficiencies (legal
deficiencies, unnecessary potential negative effects, unnecessary high costs for private
agents, etc.) it will issue a preliminary opinion expressing all deficiencies found in the
regulatory proposal. The ministry has to answer all COFEMER’s observations contained in
the preliminary opinion, and it has to make the necessary changes to the draft. COFEMER
cannot veto regulations; in case the ministry or regulatory agency does not consider
COFEMER’s observations pertinent, it must clearly justify the disagreements to those
observations. There is no legal period for answering COFEMER’s partial judgments. After
the ministry has responded to a preliminary opinion, it may request a final judgment,
which must then be given by COFEMER in five working days. COFEMER has then thirty days
from the receipt of the regulation, or of the corrections or additional information requested
of the RIA, to emit a preliminary or final opinion. According to the LFPA all drafts of federal
regulations must be publicly available at least thirty working days before they are issued or
sent to the President’s legal counsel.
The main purpose of the RIA is to offer a clear justification of the regulation proposed.
In that sense, the RIA process establishes a set of standard criteria to determine if the
regulation is clearly justified: an explanation of the situation and why the government
needs to be involved; a demonstration of legal foundation; a justification of the specific
obligations imposed on private agents; an analysis of the potential effects of the
regulations; the identification of formalities created, modified or eliminated by the
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regulation; the analysis of no viable lower costs alternatives; and the assessment that no
unnecessary obstacles to trade, competition or consumer protection will be created. Most
of the elements mentioned before are part of a detailed manual that COFEMER distributes
to institutions for the elaboration and submission of RIA. The manual is also available on
COFEMER’s Web site.
Cost-benefit analysis is an important part of the questions presented in RIA. Benefits
and costs are separated into quantifiable and non-quantifiable categories due to the lack of
proper data, a problem that many institutions are facing. Risk assessment is also strongly
encouraged in the case of health, environment, safety and consumer protection regulation,
but there have been very few cases where this issue has been incorporated by regulatory
agencies. This seems to be a common problem among OECD countries, where the methods
such as benefit-cost analysis provoke discussion and need to be revised to increase the
quality of the analysis. COFEMER keeps track of the quality of all RIAs that it receives, by
grading them according to compliance with minimum standards in each of the important
section of the RIA.
Assessment
Strengthen disciplines on regulatory quality by refining tools for RIA was recommended
in 1999. It was also suggested that RIAs be systematically published during the notice and
comment process for each regulation and train public sector employees in how to conduct
RIA. Since 1997 the use of RIAs has been an essential part of draft regulations reviewing
process. It is a standard practice to evaluate, analyse and justify draft regulations. Since
October 2001, new guidelines for development of RIAs and for the development of review
process are available on-line, making compulsory to the agencies to use this new electronic
system since October 2002. The system has simplified the process and clarifies COFEMER’s
review criteria. It is also possible to consult full texts of draft proposals, RIAs and COFEMER’s
opinions. Since May 2000, over 1 300 regulatory proposals have been reviewed.
Training seminars on the new system is a permanent task. From October 2001 to now,
COFEMER has given 33 seminars for more than 740 public employees. The objectives of the
courses are to teach public servants how to use on-line system for development of RIA and
how to elaborate a RIA, to improve communication and relationship between COFEMER
and public servants in charge of the proposals, to develop skills in quantify effects of
regulation and regulatory and non-regulatory alternatives, to spread widely knowledge
about the RIA and to clarify COFEMER’s review criteria.
According to a diagnosis elaborated by COFEMER on the quality of RIA, much remains
to be done to improve the level of quantification and data analysis. Another problem is the
fact that 70% of the RIAs presented to COFEMER are elaborated by medium level officials
(directors or below),10 which reduces the quality of the product, since they have not been
trained or lack of experience and information.
The normative instruments and interpretation of legal documents that accompany
the RIA are basically used in a discretionary way by officials. The documents most often
presented with the RIA are technical standards and ministerial agreements. For the first,
the signature of an Undersecretary or even a Director General is sufficient, whereas for the
latter the Minister has to sign. The hierarchical levels of norms and the way regulations can
be submitted in different legal documents may affect the quality of RIAs (see Figure 2.2),
having also important implications regarding the complexity of the regulatory framework.
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2. GOVERNMENT CAPACITY TO ASSURE HIGH QUALITY REGULATION
Figure 2.2. Regulatory proposals received by COFEMER with RIA
by type of legal instrument
2002
2003
100
88
90
80
80
72
70
66
59
60
58
50
13
12
10 11
8
7 6
12
7 5
em
en
ts
Te
di ch
sp n
os ica
iti l
on
Pr
og
s
ra
m
m
es
5
at
ru
les
1
St
7
el
13 13
Te
st chn
an ica
da l
rd
M
in s
i
s
ag te
re ri
em al
en
t
Ci
rc
Ru
ul
les
ar
fo
ro
pe
ra
Ot
tio
he
n
ri
ns
tru
m
en
ts
Le
ga
lr
ul
in
gs
Le
ga
ln
ot
ice
s
im
ple
m
en M
tin aj
g r or
ule
s
Fo
rm
at
s
0
16
25
ws
10
28
22
lev
20
31
29
La
32
w
30
Lo
40
Source: COFEMER.
Choice of policy instruments: regulation and alternatives
One important element considered in the content of the RIA refers to the possibility of
alternative policy instruments, both regulatory and non-regulatory. There is a specific question
in the RIA that refers to this issue: “What other alternatives to the draft regulation were
considered during its elaboration? Do you consider other alternatives which can achieve the
same objectives without creating new obligations to private agents such as incentive
programmes, information to consumers or enterprises programmes, a voluntary standard, or
just a programme aimed at improving compliance with existing regulations?” Theoretically,
the RIA is prepared prior to the final process of the proposal; therefore, the analysis regarding
alternatives must be done during the process of elaborating the regulation.
Specific, detailed guidance on regulatory alternatives, such as taxes and subsidies,
voluntary agreements, information programmes such as eco labelling, self regulation,
permit trading schemes, and performance-based regulation, has not yet been developed,
although it is an important element in the discussions during the RIA training courses
offered by COFEMER.
Assessment
To promote the adoption of alternatives to traditional regulation was also suggested by
the OECD in 1999. The consideration of alternatives is a tool that can support the quality of
the regulations. The OECD has found that “the choice of policy instruments tend to be
based more on habit and institutional culture than on a rational analysis of the suitability
of different tools to addressing the identified policy problem”.11 In the case of Mexico, the
cultural change experienced with the introduction of a regulatory programme is bearing
positive fruits. The use of alternatives involves always a risk, which can have serious
consequences for the regulator, not used to deal with this approach. COFEMER has
recognised that there is a gap to close concerning the adoption of alternatives to traditional
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regulation, e.g. non-regulatory alternatives that can increase policy effectiveness and lower
cost. Including the issue in the RIA will certainly provide a consideration to experiment and
policy makers will learn that new tools are now available. This might be particularly fruitful
in the field of environmental regulations (see OECD, 2003c).
Review and simplification measures: Keeping regulations up-to-date
A systematic up-dating of regulations is a core element for effective regulation.
The revision of the stocks of regulation and administrative formalities that countries
accumulate over years has been recognised by the OECD as a major task for national
administrations. Besides the economic, social and technological changes that may
influence and change the effectiveness of regulations, their impact on the costs of doing
businesses may impose a continuous problem.
A major activity of COFEMER is the establishment and up-date of the Federal Registry of
Formalities and Services (RFTS), reinforced by the amendments to the LFPA. In 2001, a
presidential decree led to the elimination or streamlining of an additional 20% of business and
citizens formalities, and to the design of measures to streamline highest impact formalities in
each agency. All formalities and services required by ministries and decentralised organisms
must be included in the RFTS. It requires that all formalities be presented on-line in a standard
format that details requirements, documents needed, service prices, maximum response
times, duration of validity of authorisation, locations for presentation of information, etc.
Formalities that are not listed in the RFTS cannot be applied except in a limited number of
cases (formalities that last less than 60 days, formalities related to public procurement, or
services deemed to be of benefit to users), and they must be applied exactly as they appear in
the RFTS. Registration of all formalities and services was completed in May 2003, in
compliance with the time frame specified by the LFPA (see Figure 2.3).
Figure 2.3. Composition of the Federal Registry of Formalities and Services
Services
1 470
Formalities 1 049
Source: COFEMER.
An additional exercise for streamlining formalities has been established. In the first
semester of 2003 the private sector presented a list of twenty high impact business
formalities to the federal government to be simplified. The COFEMER, the Ministry of Public
Administration and several regulatory agencies worked jointly with the private sector to
review the proposals. Following this exercise, another two lists of regulatory improvement
actions for forty-eight high impact formalities were presented. Participants defined
specific actions and dated commitments in order to improve them. After careful review,
sixty-three formalities were improved.
President Fox invited the private sector to continue identifying high impact formalities
in order to improve the regulation that has the greatest effect on business competitiveness.
Furthermore, the Ministry of Public Administration and COFEMER are prioritising and
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co-ordinating a solution to 240 high impact formalities for citizens identified by the
government. Federal authorities will be working on the proposals of the private sector and
on continuing the implementation of the regulatory improvement process on its own.
The purpose of these efforts is to promote investment and enterprise expansion. The
federal government is constructing a dual strategy for regulatory reordering. On the one
hand, the government is halting the emission of regulations that affect the economy
through the moratorium (Box 2.1) and, on the other, it tries to improve or eliminate
formalities that unnecessarily inhibit economic activity.
Administrative simplification. In terms of internal administrative simplification the
Ministry of Public Administration, through its Regulatory Simplification Unit, co-ordinates
the implementation of the “Tools for Regulatory Simplification”. These initiatives do not
bind public servants to comply with administrative simplification, but signal a
commitment to introduce more transparent rules to the internal administration:
●
Normateca, a portal to register, disseminate and up-date all legal, regulatory and
administrative disposals that regulate the operation and functioning of dependencies and
entities of the federal public administration, as well as to commit all public servants to
administrative simplification, as information is filtered before being entered into the
portal. The number of federal regulations went from an initial inventory of 426 mandatory
regulations for administration and operations in 2001 to 333 by mid-2003 (22% elimination
in the regulatory burden for institutions).
●
Internal Normateca for each institution integrated in the Tools provided by the Ministry, in
order to have an internal portal to publish the regulatory framework issued for internal
use. 24 institutions have already completed the implementation of this tool.
●
Creation of Committees for Internal Regulatory Improvement. The Committees, 25 in full
operation up to now, are composed by officials subject to regulations and official issuing
those regulations. They have been the link for promoting productivity in institutions
with regulatory systems and complement the roles played by the legal and controllers’
offices, which serve as advisors to these committees.
●
Set-up of Regulatory Simplification Roundtables, composed by high-level officials from
various agencies. Their main goal is to analyse, discuss and propose improvements to
the framework of standards and regulations used by the agencies that deal with all
sectors and to generate proposals from the Executive to the Legislative.
The Ministry of Public Administration launched the System of Electronic
Governmental Formalities (TRAMITANET) in 2002, a portal (www.tramitanet.gob.mx)
designed to service the citizens, providing information regarding public and private
formalities that might be done through the Internet. It gives access to all governmental
formalities that concern citizens and businesses at the federal, state and municipal level.
It is based on the information compiled and up-dated through the RFTS. The aim of this
tool is to provide public opinion with a portal where all formalities and related information
(time tables, requirements, addresses of one-shops, etc.) are registered. It also gives
citizens and businesses the possibility to complete these formalities electronically and to
complain or report any corruption act. Since its creation, 8 million users have had access to
TRAMITANET and more than 3 million formalities have been solved.
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Assessment
In 1999 the OECD recommended to speed up effective reform by adopting a systematic
and comprehensive approach to the review of existing laws and regulations. The COFEMER
has the faculty to review the federal regulatory framework, to diagnose its application and
to present administrative or legislative proposals to improve the regulation in activities or
specific economic sectors directly to the President.
COFEMER has carried out a detailed revision and diagnosis when a specific economic
sector is subject to a significant reform. Examples of this revision are the following
initiatives: agreement for proceedings and procedures related to validity and recognition
for bachelor degree studies; reforms to the Articles 27 and 28 of the Mexican constitution;
statutory Law of National Centre for Energy Control; Energy Regulatory Commission Act;
reforms to the Public Service of Electrical Energy Act; initiative of reforms to the Federal
Consumer’s Protection Act; major regulation of Social Insurance in the matter of
Affiliation, Classification of Companies, Collection and Control Law; regulations of Private
Security; regulations of Preventive Medicine in Transport.
Periodically, COFEMER, by its own initiative, makes a diagnosis of regulatory
framework quality, in order to identify legal areas or problems that can be corrected or
adapted. These diagnoses can turn into concrete proposals for legislative or administrative
reforms. Some examples are: agreement that establishes the Rapid Business Start-up
System (SARE); methodology to elaborate an Index of Competitiveness of the Cities;
administrative habeas corpus study; major regulation of Federal Transparency and Access to
the Public Information Law; comparative analysis on radio and television legislation;
health products regulation study and diagnosis on the regulatory framework in oil and
natural gas.
The OECD also recommended to review laws and regulations to improve concession
processes. This recommendation was taken partially by COFEMER because the regulatory
framework of concessions is related to the concept of public service governed by the
Constitution. COFEMER has reviewed some concession cases which are included in
secondary federal rules, such as the Mines Law, the major implementing regulations on
natural gas and L.P. gas, the resolutions and conditions for granting radio spectrum and
public telecommunications networks concessions, etc. COFEMER reviews the general
conditions by which concessions are designed and that are contained in sector-specific
laws. Individual titles of concession, however, are not reviewed, as there is no legislative
mandate to do so.
Conclusions
Mexico has made significant progress in the implementation of its regulatory programme
since the publication of the 1999 Report. As discussed in the previous sections, Mexico
followed most of the recommendations made by the OECD. During the implementation of the
regulatory programme, new gaps have been identified, produced mainly by the dynamic of the
process and the political and institutional environment of the country. This final section
intends to give an overview of the strengths of the regulatory programme in Mexico, as well as
to show the gaps to close, considered in the Policy options section.
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Strengths of the current programme
The regulatory policy, understood as part of the public policy of a government, is
highly influenced by the institutional, legal and political arrangements. The Mexican
government has been able to combine different elements to reach clear goals that give
continuity to the project and produce tangible positive results. These achievements can be
an example for other countries.
The regulatory oversight body in Mexico: COFEMER
COFEMER has become a very successful oversight body. The Commission has been able
to develop a highly qualified programme of regulatory reform and, most important, to put it
into practice successfully in a relatively short period of time. Which are the conditions that
allowed this development in Mexico?
As a “deconcentrated body”12 (see specific description in Chapter 4 on regulatory
authorities), COFEMER is part of a trend that is reforming public institutions in Mexico,
especially in the way of managing public issues, the structure and organisation of the
public administration and the exercise of administrative duties. It is a body created by the
Executive through the enactment of a law. The COFEMER has been delegated with
important functions, and has considerable technical, operational, financial, but not organic
autonomy.
The degree of autonomy has contributed to its achievements. The strong presidential
system in Mexico is an important element to consider. Even if the COFEMER is not at centre
of government, the fact that the Director General is appointed directly by the President
gives the Commission a strong political support at the highest level and assures a
leadership in the process, at least for the six-year presidential period. The Director General
is in charge of the conception, orientation and decision of the regulatory policy, managed
by a highly qualified professional team.
The work of COFEMER is guided by the Federal Improvement Regulatory Council, a
political advisory body. As the membership of the Council has been increased, including
the presence of the consumer protection agency (PROFECO) and the competition authority
(COFECO), and businessmen have been able to express there their interests and concerns,
the Council has become a driving force for the reform, sorting out the different demands
and making clear recommendations on the way to follow.
Access to information: the IFAI and the transparency law
The IFAI appears as a cornerstone to foster transparency in government acts. Even if
the classification of information as “confidential” could be seen as discretionary by
different parties and certainly will be source of discrepancies on very sensitive political
issues, giving access to most of the government information to the citizens is a step
forward in increasing transparency. The benefits of this decision are many, going from
increasing accountability of the public servants and fighting corruption to improving
decision making in society and consolidating democracy.
It is also worth noting that for the first time a regulatory agency in Mexico has a legal
mandate to make institutions comply with regulation. Moreover, the appeal process
represents an improvement because it only concerns citizens; institutions cannot appeal
IFAI’s decisions, as is the case of other regulatory agencies. The appeal process slows the
regulatory process and imposes excessive costs.
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Regulatory quality and the use of ICT
COFEMER has been able to establish, in a short period of time and with relatively
limited resources, mechanisms and tools that are among the best developed in OECD
countries. The Federal Registry of Formalities and Services (RFTS) was a pioneer among
regulatory registers. The success of this initiative has lead to similar approaches at state
and municipality level in Mexico. Private sector has also developed compendia of laws and
regulation. This means a clear recognition of the expected commercial value of this
information for regulated companies. Moreover, it has contributed to provide accuracy and
legal security to citizens.
The development of an Advance Indicator of the Biennial Programmes (IABP) which
measures the improvements that each entity has done is a major step to evaluate its
performance. The indicator evaluates each institution from 0 to 10, considering three main
points: i) the goals expressed in the Biennial Programme; ii) the formalities that were not
reported during the elaboration of the Programme and become gaps; and iii) the late
submission of the Programme to the COFEMER. The final aggregated indicator is elaborated
monthly and it also looks at measures that could stagnate or hinder the regulatory process.
The goals of the IABP are not only to record the achievements of each institution, but to
keep track of the evolution of the regulatory policy and make it comparable in time and
with other bodies. Even if the IABP is not accompanied by a qualitative assessment of the
performance, the general public and institutions have access to the information,
influencing the need for a better performance.
The use of the Internet as a tool to promote regulatory policy with quality has been a
major achievement. COFEMER has developed on-line systems for most of its programmes,
including the submission of RIAs, which has been crucial for dissemination of information
and make public the goals, features and results of the Regulatory Improvement
Programme. In 1996 COMPRANET, an innovative process of government procurement
through Internet was introduced, improving transparency of overall procedures and
increasing communication between government and citizens. In the framework of the
National System e-Mexico, put in place by the current administration in order to integrate
the use of technologies to reduce the digital gap, the portal “e-Mexico Economy” tends to
provide a complete overview of the digital economy that can be used by businesses, in
order to foster economic growth and competitiveness.
Remaining challenges
Despite the regulatory efforts and achievements, remaining challenges require special
attention. The refinement and improvement of regulatory quality can lead to longer term
and more concrete results that would contribute to the national development. In the last six
years, the Mexican economy has been stable, being more diversified and highly integrated in
the NAFTA area, mainly to the United States. However, the economic growth performance
has been unsatisfactory: GDP growth is likely to be below 2% in 2003,13 not much above
population growth (1.8%). Low levels of human capital, gaps in adequate physical
infrastructure, scarcity of additional fiscal resources to finance development projects, strong
disparities between social groups and economic regions and acute poverty are constraining
the potential growth. Mexico still faces a widespread informal sector, whose attractiveness
relies substantially on poor incentives to enhance the formal economy.
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Productive investment has to be stepped up and domestic conditions for FDI need to
be improved. A major barrier to conditions leading to higher domestic and foreign
investment in the past has been the regulatory and legal framework. The regulatory
programme now contributes to a friendlier climate for business, providing a more
transparent and effective legal system, which can reduce costs for entrepreneurs. Some
pending issues that should be considered for revision are the following:
Policy options
1. To revise the exemptions of the LFPA, especially on fiscal issues.
According to the LFPA, the set up, revision or diagnosis of fiscal regulations is exempted
from the law. The LFPA describes fiscal issues as “the contributions and accessories that
directly derive from them”.
Contributions and accessories refer mainly to taxes. The tax system in Mexico is ruled
by the Sistema Nacional de Coordinación Fiscal, which allocates most of the taxes: income
taxes, excise taxes and the VAT are exclusively federal; the main source of state revenue is
the payroll tax; and municipalities have the property tax (predial) and some fees, such as
the one for water, as their main source of revenues. Fiscal regulations are mainly
imposed by the federal government through the Administrative Tax System (Sistema de
Administración Tributario – SAT), created in 1997 as a deconcentrated body of the Ministry of
Finance (Secretaría de Hacienda y Crédito Público). The Ministry of Finance, thus, remains the
depositary of charging taxes, but also of regulating the collection of taxes.
The fiscal regulations are exempted by law from the current programme. This feature
could be reconsidered in the future, searching ways in which fiscal regulations could be
made subject to some form of simplification and review. Numerous changes are introduced
to the system from one year to the next, often reflecting short-term considerations product
of compromises acquired during the tax law discussions. Some of the administrative
problems facing private agents, who are willing to comply, are: a complex system that
creates incentives for non-compliance; duplication of tax declarations; a complex tax code,
whose application is inconsistent across taxpayers and used in a discretionary way by
bureaucrats in the tax administration; poor co-ordination between collectors’ agencies;
inefficient system to disseminate and compare information; etc.
Tax administration is a determinant to increase tax revenue, a core problem for the
country.14 Enforcement should be a target for the present administration. The informal
sector contributes marginally to fiscal revenues and weak law enforcement motivates
possible evaders. Reducing evasion is crucial to improve the transparency of the system.
More efforts to stop evasion are needed, such as increasing audits, revise and apply
sanctions, training staff, etc. Finally, better consideration of regulatory impacts of
fiscal measures is needed if alternatives to direct regulation are to be adopted more
systematically across the federal administration. Progress on the larger issue of reducing
the informal sector also involves improving the quality of and access to public services that
contribute to economic and social development.
There are two alternatives of policy option for Mexico in this area. One approach might
be to revise the SAT and strengthen the set up of another semi-independent regulatory
quality unit linked to the Ministry of Finance. This unit would request the SAT to reduce
the costs of tax collection and of tax compliance, improving the measures already taken, in
order to modernise the tax administration and make it more efficient. But this option
would make the Ministry of Finance responsible for controlling the quality of its own
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regulations. An alternative could be to revise the LFPA and eliminate the exemption on
fiscal issues, specifically on regulations related to the collection of taxes. Then, COFEMER
would exercise oversight of fiscal regulations, as it does for other matters.
2. To broaden the scope of the regulatory improvement programme to lower levels
of government.
In most OECD countries, and particularly in those with federal structures, the
regulatory agenda has been broadened to sub-national levels of government. It has been
widely recognised that a regulatory programme that only covers the federal administration
cannot succeed in a long-term. The multi-level perspective of regulatory policy has become
a policy issue. Mexico has developed its own tools and institutional arrangements, in order
to make states and municipalities to take part in the design of the regulatory policy.
SARE has proved to be a successful tool to expand regulatory policy at all levels of
government. Nevertheless, innovation, resources and co-ordination need to be increased to
complement the system and make it truly viable for many cities in Mexico. More resources
– human, technical and financial – should be allocated to the SARE because training of officials,
the use of new technologies and the set up of SARE’s front desks for all government levels are
fundamental for the continuity of the system. To increase the number of participants in the
SARE should be a permanent goal of COFEMER through constant promotion.
SARE is an instrument aimed to reduce the red-tape for low risk activities, but it might
be the cornerstone for establishing a similar mechanism for high risk activities. In terms of
benefits, evidence shows that micro, small and medium enterprises have profited from the
system. SARE could be co-ordinated with other institutions or programmes, like Centros de
vinculación empresarial15 or the Fondo Pyme, in the framework of the Programa de Desarollo
Empresarial 2001-2006.
3. To promote a better legal framework for regulations with a clear hierarchy of rules.
The legal framework for regulations presents important gaps in design and structure,
which influence the revision process of COFEMER. Two main problems arise in this context.
First, as a result of a growing number of norms and regulations, the legal system is rather
complex and difficult to manage, based on legal documents which are hardly classified in a
coherent framework.16 The LFPA describes as “administrative acts”17 broad range of legal
documents: presidential rulings (reglamentos), decrees, agreements, NOMs, circulars and
formats, but also guidelines, criteria, methodologies, instructions, directions, rules or whatever
disposal that establishes specific obligations by ministries or decentralised organisms, which
have to be published in the Official Gazette, lacking any systematisation of the normative
framework. There are also an important number of general norms that are not published, but
impact the administrative legal order. Secondly, the large number of administrative bodies that
have regulatory faculties, as well as their internal structure, make it difficult to establish a
common hierarchy for administrative procedure laws and regulations. In most the cases,
regulations are issued by secondary bodies which have the competency through delegation,
which increases “the fragmentation of the regulatory faculty”.18
In the same way, the incorporation of international treaties to the national legal order
provides a new source of regulations. The national administration has to respond to these
requirements, but COFEMER has only a limited participation in an ex ante evaluation that
could contribute to clarify their implementation and the harmonisation with the national
legal system.
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As discussed in previous sections, the lack of a hierarchical order of regulations may
have a negative impact on the work carried out by COFEMER, as discretionary use of legal
documents and regulations are to detriment of transparency and the compliance efforts
are reduced by ineffective enforcement mechanisms. Legislation that lacks clarity may
constrain the range of alternative policy tools, affecting the potential of RIA. In this sense,
Mexico should consider:
To reinforce the analysis of the legal documents that accompany the RIA
COFEMER has been able to identify the kind of legal documents used by officials to
introduce, modify or eliminate a regulation. As was indicated, the RIA process in Mexico
confronts an unsystematic framework. A more coherent legal design could reduce the
scope for low level officials to approve legal norms that can be costly to the system. It
would be advisable to find ways to harmonise the use of legal instruments which might
have an impact on the quality of RIA. COFEMER should maximise the political commitment
to RIA and seek ways to improve the hierarchy of normative instruments.
4. To modernise the framework for regulatory authorities.
This recommendation was part of the set published in the 1999 Report. More details
will be found in Chapter 4 on regulatory authorities in the present report. It is worth noting
at this stage that a very wide range of regulatory bodies with regulatory functions exists in
Mexico. In the course of setting up this kind of institutions, the governance arrangements
are fundamental for their good performance, as the establishment of the process of the
IFAI has showed. Some elements to consider during the creation of these bodies are: the
degree of autonomy within the Executive branch, the role of the President and the
Legislative branch to designate senior officials and boards, technical organic laws that
describe in detail procedures and institutional arrangements, etc.
Strengthening co-ordination and decision making among different Ministries and
institutions in Mexico, in order to establish bodies that are competent and strong enough
to provide good results, is fundamental for the establishment of independent regulators.
COFEMER can provide a strong technical and analytical feedback as oversight body for
regulatory reform.
5. To strengthen the efforts on quality regulation through the refinement of some
regulatory tools.
Tools to increase transparency, a key pillar of effective regulation, include:
Qualitative assessment of the Advance Indicator of the Biennial Programmes (IABP)
This could help the COFEMER to integrate a more comprehensive analysis of the
compliance of the Biennial Programmes presented by entities of the federal public
administration, identifying what kind of problems are faced by different institutions.
To reinforce public consultation mechanisms
Public consultation is important to regulatory quality. Its benefits cover a wide range
of aspects, especially because it helps governments to have more analytically based
models of decision making which are fundamental in determining practicability and
designing compliance and enforcement strategies.
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The LFPA does not prescribe a compulsory mechanism to establish public consultation
in the elaboration, modification or elimination of regulations by the Mexican government.
However, the COFEMER makes publicly available all draft federal regulations and has
encouraged institutions to put consultative mechanisms into place. The legal gap still
poses limitations to transparency because government officials preserve discretionary
powers on how to organise consultation mechanisms. The risk of capture by vested
interest groups increases as well, since the legal framework is weak in this respect.
To encourage plain language drafting
Even if COFEMER is trying to promote plain language drafting in the use of RIA and the
Federal Register of Formalities and Services, the lack of comprehensibility of regulatory
text remains an important regulatory quality problem. Regulatory goals, strategies and
requirements must be clearly articulated to the public. Legal texts have to be read and
comprehended by non-experts, which will help to increase public confidence in the
regulatory programme.
To fully exploit the use of Internet to increase transparency and make information
available to the public
Even if a new electronic system for submitting RIAs has been elaborated and texts of draft
proposals and its corresponding RIAs, as well as some COFEMER´s opinions are available
on-line, there is still much to do in promoting the Internet site. Since not all proposals and
information on regulations, such as public comments, additions and corrections to RIAs, and
preliminary and final opinions, are available, COFEMER should try to expand the use of ICT to
increase transparency and provide more information to policy makers.
To undertake technical assistance towards regulatory quality for the legislative branch
Up to now, the regulatory programme in Mexico has been implemented to the Executive
branch. According to the LFPA, it covers dependencies and entities that integrate the federal
public administration, with some exemptions of regulations already mentioned. In the
Mexican case, however, the legislative branch is acquiring an important role in law initiation,
due to the redefinition of duties in the framework of the division of powers between branches
of government. The law making process in the Legislative is obviously beyond the oversight of
COFEMER, but parliamentarians and their staffs could be provided with technical assistance,
i.e. training courses, to incorporate regulatory tools in the design of laws and regulations that
might have an impact on economic activities and delay regulatory improvement.
6. To strengthen compliance and enforcement mechanisms.
One major problem in Mexico directly linked to compliance is the large informal sector
of the economy. This situation might improve if the Mexican economy grew more rapidly,
but its growth is partly handicapped by regulatory fiscal barriers: many small firms know
that the compliance costs can be disproportionately higher. This trend also leads in many
cases to corruption, which is cheaper than the cost of compliance. Economic incentives
have been used to integrate businesses into the formal sector, like the ones put in place by
local governments in the framework of the SARE.
Even if the problem is broad and there are economic, cultural and social
considerations, important steps should be taken to reinforce compliance, and to build
confidence and trust in government actions. A first approach could be to reinforce
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communication mechanisms, as mentioned above with public consultation, in order to
make Mexicans understand the nature of the process and advantages to implement it. The
simplification of legal requirements, in order to reduce complex and unclear regulation, as
well as the improvement of judicial interpretation to enforce regulations has to be
strengthened. The improvement of public services and stronger supervision mechanisms,
which can only be gradual and continual, should further attract businesses to participate
in the formal economy.
7. To consider regulatory quality as a tool for economic and social development.
In the report Regulatory Policies in OECD Countries: From Interventionism to Regulatory
Governance, the OECD pointed out the importance of regulatory policy as a dynamic process.
Regulation is considered an integral part of good governance; that is, “the tasks involved in
exercising regulatory functions go beyond the design and implementation of instruments, or
their co-ordination, and also embrace wider issues that are integral to democratic
governance, such as transparency, accountability, efficiency, adaptability and coherence”.19
In order to translate high quality regulatory design into welfare for people, regulatory
implementation needs to be as effective as possible. Regulatory policies, institutions and
tools have to be part of a coherent project that has clear and defined goals. Mexico has been
able to achieve positive records on macroeconomic stability, after decades of recurrent
crisis. But sustainable economic growth and social welfare are pending issues that
challenge these results. The state retreated from its large interventionism in the economy
in the course of market liberalisation and privatisation. However, these processes also have
to be accompanied by a proper regulatory framework that fosters equity, efficiency and
makes sure that economic gains are shared across society. Today the importance of
regulation has been recognised at the highest political level: regulatory policy is integrated
in the government action. What other role can the regulatory programme play in order to
foster economic growth and translate into social gains for citizens?
The relationship between the state, the economy and society in Mexico, as in many
other OECD countries, is in transition. Regulatory policy should be seen as a tool to regulate,
in a more transparent, accountable and responsible way. It is not a question of increasing the
number of regulations, but to regulate with quality. In this sense, most of the regulatory
programme’s objectives are long term, even if some positive results have been already
reached, proving the need to support and expand the regulatory policy. Regulatory policy
needs to be seen as a “whole of government” project, not isolated. A broad range of policy
areas can be identified to set more ambitious goals that have an impact on economic growth
and welfare. COFEMER could play a role in this task. Besides the fact that there are gaps to
close in the design of the current regulatory programme, COFEMER could explore new policy
issues where its work could have a strong impact, such as labour and social regulations.
Notes
1. According to Article 26 of the Mexican Constitution the federal government must prepare a national
development plan. The Law of Planning (Ley de Planeación) establishes that the Plan has to define the
national objectives, the strategy and priorities for integral and sustainable development of the
country for a period of six years (the corresponding presidential term). It sets the global and regional
political guidelines and it is elaborated through public consultation with different social groups.
2. Arellano G. David/Guerrero, Juan P. (2000), Stalled Administrative Reforms of the Mexican State,
Documento de Trabajo, No. 88, CIDE, Mexico.
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3. Some initiatives to include a career civil service in the Mexican administration were discussed in
the past. In 2003 a new Law of Professional Civil Service in the Public Administration was issued by
Congress, integrating a career civil service for the core public administration which will be
introduced in different stages by the ministries.
4. Mexican Presidency (2004), How are we doing halfway down the road…?, Mexico.
5. The 1997 OECD Report on Regulatory Reform, based on the 1995 OECD Council Recommendation
on Improving the Quality of Government Regulation, recommends that countries “adopt at the
political level broad programmes of regulatory reform that establish clear objectives and
frameworks for implementation”. Both recommendations are currently subject to an up-dating
exercise, but their thrust is expected to remain unchanged.
6. Centro de Estudios Económicos del Sector Privado (2003), Calidad del marco regulatorio en las
entidades federativas mexicanas. Estudio comparativo 2002, CCE, Mexico.
7. Legally, the COFEMER is a “deconcentrated administrative body” from the Ministry of Economy.
This legal figure has been recurrently used by the Mexican government since the enactment of the
Organic Law of the Federal Public Administration in 1976. The main goal was to create regulators
that even if have been provided with decision powers, are not completely independent. The
hierarchical link with a supreme body does not disappear, but the deconcentrated bodies are able
to take decisions, implement their law-mandate and manage their own budget.
8. Cámara de Diputados (2000), Diario de los Debates, Mexico, 23rd March.
9. Cortés Campos, Josefina; Cossío Díaz, José Ramón; Mejía Garza, Raúl; Roldán Xopa, José (2002),
“Orden jurídico administrativo federal y mejora regulatoria”, in Este País, No. 140, Noviembre, Mexico.
10. COFEMER (2003), Costos y dinámica de la regulación en México, June.
11. OECD (2000), Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, Paris,
p. 52.
12. There are more than 70 deconcentrated bodies in the Mexican federal administration. Not all of
them have the same organic and functional structure.
13. OECD (2004), OECD Economic Survey, Mexico, Volume 2003, Supplement No. 1 – January 2004, Paris, p. 10.
14. The tax/GDP ratio in Mexico is the lowest among OECD countries and one of the lowest in Latin
America: including social security contributions and all payments by PEMEX to the government,
tax revenue amounts to 18.5% of GDP (excluding oil-related revenue the ratio drops to 15%).
15. The Centros de Vinculación Empresarial are part of a network for SMEs services. They are a tool to
integrate competitiveness to business culture through assistance and consultancy. They are set up
by collaboration agreements signed between the Ministry of Economy and businesses associations
mainly at state level. Training courses are offered in a very broad range of issues and are provided
by businesses with leading edge technology.
16. A study requested by COFEMER pointed out that the administrative legal system presents
important deficiencies. All general norms emitted by the President or any body of the federal
public administration, from 1994 to 2002 and classified according to issuer and recipient, legal
basis, regulated subject and normative hierarchy, were included in the analysis. They provided a
final conclusion: “existe una diversidad de instrumentos normativos emitidos por una pluralidad
de órganos cuyo rasgo común es la inconsistencia normativa, lo que dificulta la ubicación de cada
una de ellas en algún lugar cierto del edificio normativo. Por la pluralidad de órganos que las
emiten, sus contenidos normativos y las variaciones en su fuerza de innovación, muestran un
ordenamiento de difícil conocimiento, racionalización, manejo y operación, panorama con el
que tiene que trabajar la organización administrativa, expresarse la política publica y ser
instrumentada”. Cortés/Cossío et al. (2002), op. cit., p. 4.
17. Ley Federal de Procedimiento Administrativo, Article 4, México, 23 March 2000.
18. Cortés; Cossío et al. (2002), op. cit., p. 27.
19. OECD (2002), op. cit., p. 16.
Bibliography
Arellano, G. David and Guerrero, Juan P. (2000), Stalled Administrative Reforms of the Mexican State,
Working Paper, No. 88, CIDE, Mexico.
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2. GOVERNMENT CAPACITY TO ASSURE HIGH QUALITY REGULATION
Auditoria Superior de la Federación (2004), “Evaluación del Programa de Mejora Regulatoria a cargo de la
Comisión Federal de Mejora Regulatoria”, Mexico, mimeo.
Centro de Estudios Económicos del Sector Privado (2003), La Mejora Regulatoria en México : Avances y su
Importancia para el Desarrollo Económico del País, Working Paper, No. 247, CEESP, Mexico.
Centro de Estudios Económicos del Sector Privado (2003b), México. Calidad del marco regulatorio en las
entidades federativas mexicanas. Estudio comparativo 2002, Mexico.
Cortés Campos, Josefina, Cossío Díaz, José Ramón, Mejía Garza, Raúl and Roldán Xopa, José (2002),
“Orden jurídico administrativo federal y mejora regulatoria”, in Este País. Tendencias y Opiniones,
No. 140/2002, Mexico.
Fix-Fierro, Hector (2002), El amparo administrativo y la mejora regulatoria, Instituto de Investigaciones
Jurídicas, Mexico.
Fix-Fierro, Hector and López-Ayllón, Sergio (2001), “Legitimidad contra legalidad. Los dilemas de la
transición jurídica y el estado de derecho en México”, in Política y Gobierno, 8:2, Mexico, pp. 347-393.
López-Ayllón, Sergio and Fix-Fierro, Hector (2003), “‘¡ Tan cerca, tan lejos ¡’ Estado de derecho y
cambios jurídicos en México (1970-2000)”, in Fix-Fierro, Hector et al. (2003), Culturas jurídicas latinas
de Europa y América en tiempos de globalización, Universidad Nacional Autónoma de México, Mexico.
OECD (1999), Regulatory Reform in Mexico, Paris.
OECD (2002), Regulatory Policies in OECD Countries. From Interventionism to Regulatory Governance, Paris.
OECD (2003a), From Red Tape to Smart Tape. Administrative Simplification in OECD Countries, Paris.
OECD (2003b), OECD Territorial Reviews: Mexico, Paris.
OECD (2003c), OECD Environmental Performance Review: Mexico, Paris.
OECD (2004a), OECD Economic Surveys 2002-03: Mexico, Paris.
OECD (2004b), Competition Law and Policy. Review of Mexico, Paris, OECD, DAFFE/COMP(2004)1.
Secretaría de Economía (2001), Programa de Mejora Regulatoria 2001-2006, Mexico.
World Bank (2001), Mexico. A comprehensive Development Agenda for the New Era, Washington, DC.
World Bank (2004), Doing Businesses in 2004, Washington, DC.
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OECD Reviews of Regulatory Reform: Mexico
Progress in Implementing Regulatory Reform
© OECD 2004
Chapter 3
Market Openness
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Introduction
In 1999, the OECD review of regulatory reform in Mexico considered how domestic
regulations, regulatory procedures and practices in Mexico affect the openness of the
Mexican market and formulated policy recommendations aimed at enhancing the market
orientation and trade and investment-friendliness of the Mexican regulatory environment.
Since that date, Mexico initiated a number of institutional and policy reforms, with a view
to improve the domestic regulatory environment for Mexican and foreign businesses, as
well as to set favourable conditions for Mexican competitiveness in the global marketplace.
Notable developments that shape Mexico’s current attitude towards market openness
and regulatory reform include the creation in 2000 of the Federal Regulatory Improvement
Commission (COFEMER) in charge of co-ordinating a wide-ranging regulatory improvement
programme established through the 2000 Federal Administrative Procedures Law; the
enactment in 2002 of the Federal Law on Transparency and Access to Public Information;
the expansion of Mexico’s network of free trade agreements to some of its Latin American
neighbours and to the European Union; and the creation in 1999 of the Mexican
Accreditation Entity.
The aim of this monitoring report is to discuss these and other important
developments which have taken place since the 1999 review, assess to what extent Mexico
has implemented the policy recommendations formulated in this review and report on the
progress made in promoting a free and open trade and investment environment and on the
new challenges facing Mexico on this front.
Transparency and openness of decision making
The 1999 report noted that domestic regulation and technical standards in Mexico were
formulated on the basis of extensive public consultations and transparent processes. One of
the OECD recommendations was that Mexico should continue to foster and enhance these
good regulatory practices, for example, by making the regulatory impact assessments (RIAs)
prepared for proposed regulations publicly available through the Internet.
Mexico has not only implemented this recommendation by making RIAs publicly
available, but it has also taken additional steps to enhance transparency through the
reform of the Federal Administrative Procedure Law, creating COFEMER, and the enactment
of the Federal Law of Transparency and Access to Public Information. Important new steps
were also taken in a number of specific policy areas, such as foreign trade, customs
procedures, and government procurement.
Transparency in the making of regulations
Part of COFEMER’s mandate is to guarantee transparency in the drafting, amendment
and application of regulations and the simplification of administrative procedures and
formalities. Indeed, transparency can be achieved to a large extent through the publication
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of relevant information in the Diario Oficial de la Federación (Official Journal of the Federation
or DOF) and on the Internet via the corresponding government Web sites.
For example, Ministries who issue new requirements, licenses, permits, etc. have the
obligation to submit RIAs to COFEMER for review. COFEMER in turn publishes them in its
Web site for public comments for a period of 30 working days. Thus, regulatory decisions
are taken on the basis of analysis, transparency and public consultation. All relevant
information concerning RIAs and the Federal Registry of Procedures and Services (Registro
Federal de Trámites y Servicios – RFTS) are available online. This disclosure allows any
interested parties (domestic and foreign) to review and comment on proposed changes to
legislation; it also provides them with full information concerning the requirements and
obligations for all federal procedures and compels government agencies and civil servants
to adhere strictly to established guidelines and requirements, which in turn minimises the
risk of corruption.
Despite these substantial improvements, the private sector and parts of the public
administration have questioned whether the time allowed for consultation and review was
always sufficient. Concerns have also been raised with respect to transparency of state and
municipal legislation. Furthermore, the operation of existing prior notice mechanisms may
raise questions of accessibility, since, although Internet is a powerful and far-reaching tool,
Internet penetration is relatively low in Mexico (15.7 telephone lines per 100 inhabitants,
10% of the population formally connected). In practice, it is difficult to accurately measure
to what extent interested parties can effectively be reached, since not everyone has
immediate and reliable Internet access, but personal connection can be complemented by
office connection, Internet cafés and community hubs in some municipalities.
Enhancing access to public information
Mexico has stepped up efforts to enhance access to public information through the
enactment of the Federal Law of Transparency and Access to Public Information (Ley Federal
de Transparencia y Acceso a la Información Pública) in June, 2002 and the creation of the
Federal Institute of Access to Public Information (Instituto Federal de Acceso a la Información
Pública – IFAI, at www.ifai.org.mx). The new Law provides that interested parties (national and
foreign) should have access to all federal public information in possession of any federal
government agency or institution, and IFAI guarantees that such access will be effectively
granted. Some of the main objectives of the Law are: to enhance transparency in all federal
government actions; to provide access to information to interested parties; to guarantee
protection of personal information in possession of government agencies; to enhance
accountability of public servants; to improve the organisation, classification and handling of
documents; and to contribute to the enhancement of property rights. In principle, all
government information is considered to be public, unless it is classified as reserved
or confidential.
The IFAI was created in order to assure an adequate operation of the Law by promoting,
supervising and fostering the right to access information and to solve any controversies arising
out of refusals to grant access to information. Civil servants and government officials are
accountable and shall have administrative liabilities if they are found to have been misusing
the information under their custody; acting with carelessness, or ill-interested towards the
filing of requests for information; and/or unjustifiably denying any requests of information.
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The Transparency Law and the IFAI appear as useful steps taken by Mexico to improve and
guarantee transparency. However, their creation is quite recent and it is therefore advised to
monitor their development over the next few years to determine their actual effectiveness.
Transparency in the area of Foreign Trade
The Foreign Trade Law (Ley de Comercio Exterior) was amended and restructured in
March, 2003 in order to harmonise certain provisions and language of the law with the
Antidumping and Subsidies Agreements of the WTO; and to set higher levels of
transparency, including precision of use of certain terminology and consolidation of
articles under the relevant chapters. In addition to this, the Vice-Ministry for International
Trade Negotiations (VITN) co-operates closely with COFEMER and gives its opinion
regarding possible inconsistencies between domestic regulations and Mexico’s
international obligations. Public consultations and other trade advocacy activities are held
whenever trade agreements are being negotiated by Mexico or when amendments to traderelated regulation are being proposed. For these objectives, the VITN has identified and
developed a network of representatives of civil society in different sectors.
However, current consultation and trade advocacy activities could be made more
efficient if there were better and closer co-operation between government agencies. The
30 day period given for commenting on regulatory proposals is not always sufficient,
including for other government agencies. In the case of trade-related regulation, the VITN
may sometimes receive information in advance, directly from certain ministries with
which they have a close link. This allows them additional time for scrutinising efficiently
for potential impacts on market openness or inconsistencies with Mexico’s international
commitments. However, as this co-operation is not consistent across the federal
government, strengthening intra-governmental co-ordination might be a worthwhile
endeavour in the future.
Transparency concerns have also been raised at the international level. Without
prejudging about the validity of their arguments, it must be noted that some of Mexico’s
trading partners have complained about a possible lack of transparency concerning
standards and phytosanitary requirements. For example in the WTO case concerning
Certain Measures Preventing the Importation of Black Beans (WT/DS284) Nicaragua argued,
inter alia, that Mexican authorities refused to furnish importers with the document
containing the phytosanitary requirements; failed to publish the specific phytosanitary
requirements; and failed to publish the rules, requirements and procedures concerning the
tender for the quota allocation of black beans from Nicaragua. This dispute was resolved
during the consultation phase through negotiations between the two governments. On
11 March 2004, Nicaragua notified that its complaints had been adequately addressed by
the Mexican authorities and therefore formally withdrew its request for consultations.
Transparency in the area of Customs Procedures
The General Customs Administration has made important efforts to provide relevant
information to the public on import/export procedures and customs issues through their
Web site (www.aduanas.gob.mx); by issuing dissemination materials (leaflets, pamphlets,
etc.); and by setting up inquiry points in all major and mid-sized cities in the country as
well as a toll free inquiry line that offer assistance and guidance for the public in fiscal and
customs matters. In addition, there is close co-operation between the Customs authority
and the private sector in order to improve and facilitate customs operations.
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Facilitation Committees are held regularly to exchange viewpoints between Customs and
concerned businesses in order to solve specific problems that the trade community faces when
dealing with the daily customs operations. Additional meetings take place with the
participation of government officials from different agencies including Customs and
representatives of the private sector with the purpose of disseminating the Customs Law,
regulations and their amendments. However, some parties have suggested that the intricacy of
existing revenue collection procedures and formalities could be greatly alleviated if they were
subject to the review, assessment and de-regulation procedures undertaken by COFEMER.
Transparency in the area of Government Procurement
In 1996, Mexico launched an innovative, Internet-based government procurement system
known as COMPRANET (www.compranet.gob.mx). This Web site, developed and managed by the
Secretaría de la Función Pública (Ministry of Public Service, www.funcionpublica.gob.mx), is free of
charge and available to all interested parties. It contains the legal framework, bidding
opportunities, statistics, notifications and all other relevant information for government
procurement activities. As highlighted by the 1999 Report, the introduction of this system had
greatly enhanced transparency in this sector. Since then, Mexico has taken additional
steps further improving transparency, even if the area of government procurement is still
highly regulated.
In May 2000, the Federal Law on Acquisitions and Public Works (Ley Federal de
Adquisiciones y Obra Pública), which contained provisions applying both to public works and
to goods and services procurement, was replaced by two distinct procurement regimes: the
Law on Acquisitions, Leasing and Services of the Public Sector (Ley de Adquisiciones,
Arrendamientos y Servicios del Sector Público – LALSPS); and the Law of Public Works and
Related Services (Ley Federal de Obras Públicas y Servicios relacionados con las mismas – LPWRS).
With these changes Mexico sought to simplify its government procurement regime to
make it more practical and transparent by separating purchases, leasing and services on
one hand, and public works on the other. The legal framework establishes clear provisions
concerning the requirements, procedure, invitation, selection criteria, awards, review
process, etc. In particular, it stipulates that public procurement of good and services must
generally be conducted by public tender. In practice 80% of procurement is conducted by
public tender. On the other hand, federal legislation does not cover state purchases, as
government procurement is not centralised in Mexico.
In spite of the above, some businesses argue that the current regulatory framework
still leaves room for government officials’ discretionary and interpretative powers. They
question the possibility to favour domestic groups through national bids which, by
definition, exclude foreign participation. The Mexican government addresses concerns and
disputes through a reviewing body empowered to take notice of and solve infringements to
the government procurement legal framework. The Ministry of Public Service, which has
representations/delegations in all government agencies, has the power to request
information, verify procedures, performs visits and inspections to the entities that carry
out procurement activities. The Ministry has the role of an impartial and independent
reviewing authority, with no interest in the outcome of the procurement, so as to avoid
discretionary interpretations in government procurement procedures. This Ministry is
responsible for investigating and submitting recommendations, as a result of any bid
challenge procedure, to verify that the procurement procedures are performed in
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accordance with the Law, through its representative offices in the entities and government
enterprises, making recommendations that are mandatory for the procuring agencies.
Non-discrimination
The 1999 Report has noted that overtly discriminatory regulatory content was fairly
exceptional when viewed from an economy-wide context and against Mexico’s trade
commitments. Potential problems of discrimination in domestic regulation that would
conflict with Mexico’s international commitments are generally addressed through the
co-ordination between the VITN and COFEMER. Beyond issues of non-discrimination at the
domestic level, the 1999 Report recommended that Mexico should seek to ensure that its
bilateral or regional approaches to regulatory co-operation are designed and implemented
in ways which would encourage broader multilateral application. This recommendation is
widely observed by Mexico in all its regional co-operation endeavours.
Regional co-operation
Mexico has continued to work intensely in the establishment and expansion of its
network of free trade agreements (FTAs), continuing the liberalising trend driven by the
NAFTA. After 1999, Mexico has entered into Economic Complementation Agreements with
Uruguay (2001) and Brazil (2002); and free trade agreements with: Nicaragua (1998), the
European Union (2000), Israel (2000), the European Free Trade Association – EFTA (2001), the
Northern Triangle (Salvador, Guatemala and Honduras) (2001) and Uruguay (2003).
Negotiations for an FTA with Japan have been concluded and the agreement is expected to
enter into force during 2005. In addition Mexico has signed a number Bilateral Investment
Treaties (BITs) with over 20 countries. Currently less than 10% of Mexico’s trade occurs at
MFN rates, not surprisingly, as trade with the United States, the most important trading
partner of Mexico, is on a preferential basis.
Although free trade agreements are in essence preferential and, as such, are an
allowed exemption from the non-discrimination principles (NT and MFN) embedded in the
Multilateral Trading System, by amending and conforming its domestic regulation to
comply with international obligations, Mexico has in effect tried to extend some of these
preferential benefits to all WTO members on a non-discriminatory basis to the extent that
domestic legislation (e.g. investment, intellectual property and competition and certain
customs procedures) does not differentiate between FTA members and non FTA members.
Therefore, if a specific sector is liberalised in a FTA, such liberalisation also benefits
third parties. Laws such as the Foreign Investment Law (Ley de Inversión Extranjera), for
example, make no distinction between foreign parties and, therefore, essential principles
such as non-discrimination, no imposition of performance requirements and free transfer
of funds, which are clearly established in the Foreign Investment Law (FIL), are accessible
to third parties. The only distinctions refer to the more specific advantages offered to the
preferential trading partners, for example standstill provisions and investor-State dispute
settlement mechanisms.
The framework for foreign investment
Since the enactment of the FIL in 1993 and of the regulations adopted in its framework
in 1998, Mexico started an aggressive deregulation policy through the establishment of a
clear, self-contained legal framework, improving the environment for domestic and foreign
investors. This trend has continuously progressed and today, nearly 92% of all economic
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activities are fully liberalised, i.e. they are totally open to foreign direct investment. The few
remaining sectors and activities have either ownership limitations or prohibitions. As a
general rule, the FIL allows any foreign investor to participate without limitation in the
capital stock of Mexican companies.
Some of the main prohibitions and limitations are:
a) Activities reserved to the Mexican State: Oil and other hydrocarbons, basic petrochemicals,
electricity, g eneration of nuclear energy, radioactive minerals, telegraph,
radiotelegraphy, postal service, bank note issuing, minting of coins, and control,
supervision and surveillance of ports, airports and heliports.
b) Activities reserved to Mexican Nationals or Mexican Companies with a Foreigner’s Exclusion
Clause: Domestic land transportation for passengers, tourism and freight, except for
courier services (in which FDI is allowed up to 100%); retail sale of gasoline and
distribution of liquefied petroleum gas; radio and television broadcasting, other than
cable and satellite television (in which FDI may participate up to 49%); credit unions,
development banks, and some professional and technical services.
c) Activities under Specific Regulations: Some examples include: i) up to 10% in co-operative
production enterprises; ii) up to 25% in domestic air and air taxi transportation services;
iii) up to 49% in certain financial institutions; artificial explosives, fireworks, firearms,
cartridges and ammunition; printing or publication of newspapers for distribution in the
Mexican territory; 1 companies owning land for agriculture, livestock or forestry
purposes; fishing; 2 certain port services; 3 airplanes and railway equipment; and
telecommunication services concessionaires.
d) Activities requiring prior approval by the National Commission for Foreign Investment (NCFI):
Favourable resolution by the NCFI is required for foreign investors to participate in a
percentage higher than 49% in: port services for vessels in internal navigation; shipping
companies providing international maritime transport services; airfield concessionaires or
permit holders; private education services; legal services; credit information institutions;
securities rating institutions; insurance agents; cellular and mobile telephony; construction
of pipelines for the transportation of petroleum and its derivatives; petroleum and gas
drilling works; building, operation and exploitation of railways as well as supply of railway
transportation services. A similar procedure is applied to acquisitions of more than 49% of
the capital stock of Mexican companies in non-regulated activities, when the total value
of the assets of such Mexican companies exceeds the annual threshold determined by
the NCFI.4
e) Additional constitutional limitations: Foreign nationals or foreign enterprises cannot
acquire real estate within Mexico’s restricted zone, i.e. a 100-kilometre strip along the
country’s borders or in a 50-kilometre strip inland from its coasts. Outside the restricted
zone foreigners and companies without a foreigner exclusion clause seeking to acquire
real estate must subject themselves to the terms and conditions of Article 27 of the
Constitution and, if applicable, obtain a permit from the Ministry of Foreign Affairs.
Despite the fact that this strong liberalising trend in trade and investment has driven
Mexico to a progressive and continuous lowering of its traditional trade barriers (i.e. tariffs)
and opening up to foreign investment; several parties, foreign and domestic (including the
private sector and academics), have expressed concerns about ongoing non-tariff and
regulatory barriers. For example, in the area of government procurement, domestic
suppliers are granted price preferences of 10% and local content requirements of up to 50%
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are applied to national tenderers. A large share of government procurement remains
subject to national tenders reserved for domestic suppliers. FTA partners receive
preferential access to Mexico’s government procurement market, including guaranteed
national treatment, which entitles them to the 10% price preference margin provided for
domestic suppliers, unlike for other foreign tenderers. Mexico is not a member of the GPA.
At the multilateral level in recent years Mexico’s trading partners have filed a number
of WTO cases questioning, among other things, Mexico’s regulatory policies.5 Since many
cases are still pending resolution no conclusions or implications should be drawn as to the
compatibility of Mexico’s regulatory policies with WTO principles and provisions, other
than indicating the type of concerns raised by certain WTO members. For example, in the
case concerning Tax Measures on Soft Drinks and Other Beverages (WT/DS308) the US
expressed concerns about discrimination in favour of domestic industries which, if found
to be true, would be inconsistent with Mexico’s national treatment obligations under GATT
Article III. Mexico recognises that there are areas where problems still exist and has taken
important steps to address them.
These problems are more evident in the areas where different laws, policies and
regulators interact, since there can be several different (and sometimes conflicting) views
on how to address a specific issue. A more integrated approach and co-ordination between
government agencies would help provide stronger coherence between Mexico’s
international obligations and its domestic policies and regulations.
Moreover, as the benefits from diminishing tariffs begin to erode, Mexico has to take
further steps to continue to benefit from trade liberalisation and open markets. It is
therefore crucial to push forward much needed structural reforms to promote investment
and competition in essential service and infrastructure sectors like electricity, transport
and telecommunications. Because these sectors have a direct impact on almost every
industry, their efficient functioning is critical to boost the productivity and
competitiveness of the economy in order to foster development and economic growth.
Measures to avoid unnecessary trade restrictiveness
With respect to trade restrictiveness, the 1999 report had expressed a cautiously
positive assessment of the Mexican regulatory environment: regulatory practice obviously
sought to avoid unnecessary trade restrictiveness, even if the principle was not formally
included among the guiding principles adopted by Mexico under its deregulation
programme. However, the fact that trade restrictive regulations, formalities or practices
persisted in some policy areas brought around the recommendations to formalise the
principle in the context of regulatory impact assessments and to promote its
implementation at the state and local level.
The assessment of trade effects in the context of RIA
The Federal Administrative Procedures Law adopted in 2000 upgraded the approach to
regulatory improvement through the creation of the Federal Regulatory Improvement
Commission (COFEMER), the setting up of the RFTS and the expansion of regulatory
improvement policy to additional policy areas. In particular, regulatory improvement
policy now also covers federal public procurement and official technical regulations
(Normas Oficiales Mexicanas – NOMs), as well as the acts of authority and exclusive services
of decentralised agencies and financial authorities. This expansion allowed a better grasp
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of policy areas that bear an important potential for trade and investment restrictiveness
and offered the opportunity for a centralised advocacy of a trade and investment-friendly
regulatory environment. This advocacy responsibility of COFEMER is further supported by
the close day-to-day working relations established with the VITN and the department of
Domestic Trade in the Ministry of Economy in order to promote regulations that might
enhance domestic and international trade and investment. In particular, the VITN will
advice about the consistency with Mexico’s international commitments, thus seriously
reducing the likelihood of unintended frictions with the country’s trading partners.
At the same time, the Federal Regulatory Improvement Programme for 2001-06
specifies that proposed regulation should not impose unnecessary barriers to market
competition and trade. Consistent to the recommendation of the 1999 report, regulatory
impact assessment reviews must now consider the potential effects of proposed regulation
on domestic and international trade, a consideration that was not formally incorporated in
previous RIAs. The Guide for the preparation of RIAs requires regulatory agencies to make
sure that regulation does not affect market access or impose unnecessary barriers to trade.
In order to do this regulatory officials must evaluate among other things how the
proposal may affect the possibility to fix or manipulate market prices; the production
and distribution of goods and services; the import, export or transit of goods; or the
commitments undertaken by Mexico in the framework of international trade agreements.
Officials should assess whether the potential effects would be considerable or minor
and whether they may be temporary or permanent. The assessment can be based on a
qualitative evaluation if quantified information on costs and benefits is not available. Any
conclusion that there will be no measurable effects on trade and competition has to be duly
substantiated. The identification of potential effects on trade, competition, consumers and
small and medium enterprises are salient parts of the new, simpler and more focussed RIA
format, elaborated through electronic media. The introduction of the new format was
accompanied by 33 training programmes to more than 740 public servants. The formal
consideration of trade effects seems to pay off, as economic actors express general
satisfaction with the progress accomplished by Mexico with respect to the trade and
investment friendliness of federal regulations.
Regulations to implement Mexico’s international commitments also come under the
scrutiny of COFEMER, both as regards their conformity and their cost-efficiency. For
instance, COFEMER has emitted an opinion with respect to the costs for implementing in
Mexico the IATTC tuna resolutions. On the other hand, this scrutiny does not include the
upstream review of possible commitments under negotiation. The possibility of further
involving COFEMER in early co-ordination between negotiators and line ministries has
been raised as a potential tool for enhancing a more efficient follow-up once the
commitments have been negotiated. However, the current situation has not caused
significant problems in the process of preparing Mexican negotiating positions in the past,
as co-ordination with line ministries and government agencies seems quite efficiently
handled by the VITN.
Streamlining business formalities
In parallel to instituting an upstream scrutiny of the trade impacts of proposed
regulations, the Mexican administration started tackling unnecessary restrictiveness in
the stock of existing regulation. An executive decree was enacted in 2001 aiming at
reducing and simplifying federal business formalities in Mexico. Under the co-ordination
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of COFEMER, government agencies undertook to identify and streamline unnecessary
business formalities, focussing as a matter of priority on high impact formalities, but with
a view to eliminating or simplifying at least 20% of all formalities listed in the RFTS. In the
context of its Biennial Regulatory Improvement Programme (PBMR) 2003-05, each
regulatory agency identified three to five business formalities considered to have a high
impact on economic activities, with a view to simplify or eliminate them. An action list
prepared in 2003 by the Business Co-ordination Council (CCE) on behalf of the private
sector further assisted in identifying federal formalities with high impact on business
productivity in Mexico. By April 2004 the private sector had drawn the attention of the
federal authorities to 63 formalities, of which 31 have already been improved, while the
rest are expected to be streamlined by December 2004.
Streamlining continues through the biennial programmes of regulatory action established
by each government agency, which include not only regulatory drafts foreseen for the coming
two years but also projects for modifying or eliminating existing formalities. More importantly,
since May 2003, formalities can only be applied if they are listed in the RFTS and in the way
described therein (apart from a limited number of exceptions). One area, however, where
economic actors feel little progress has been made is the area of fiscal procedures. While the
programme of regulatory improvement under the LFPA does not cover fiscal policy, the law
explicitly states that the exclusion only concerns taxation, so that the related formalities
should in principle be subject to the LFPA mandate. Tackling revenue collection formalities will
thus be one of the important challenges of regulatory improvement in the years to come. This
endeavour will certainly benefit from the fact that the Minister of Finance, as a member of the
Council for Regulatory Improvement, brings a fiscal policy perspective into the government
discussion for regulatory improvement and reform.
In the specific area of foreign investment, the simplification mainly concerned the
forms that foreign investors have to submit for an application or request to the National
Registry for Foreign Investment. In parallel, formalities in the area of foreign investment
were moved closer to the users, by decentralising them to the offices of the Ministry of
Economy established in each State. A Web page centralising information on the domestic
and international investment legal framework, business formalities and FDI statistics was
created to facilitate submissions to the National Registry and respond to inquiries.
In January 2002, Mexico launched the Rapid Business Start-up System (Sistema de
Apertura Rápida de Empresas – SARE). The system is based on an identification of economic
activities that represent a low public risk (agricultural, industrial, commercial and service
activities that have little or no implications for health, security and the environment)
and which are of particular interest to small and medium enterprises. These activities
represent 55% of the activities listed in the 1999 Mexican Classification of Productive
Activities and 80% of the economic activities most frequently undertaken in Mexico.
Federal formalities to open a business in one of these activity areas have been reduced
from 8 to 2. In the context of SARE the basic formalities can be completed in one day
allowing firms to start business as soon as they are attributed their tax identification
number and to complete the remaining formalities in an additional three month period.
This facilitates the creation and expansion of economic activity in a significant manner.
However, the expected benefits are still to be realised due to the fact that sub-federal
formalities are not yet satisfactorily streamlined.
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Avoiding unnecessary restrictiveness at the state and local levels
The record is indeed mixed as far as regulation at the state and local level is
concerned. Although Mexico has taken a number of steps to improve the trade and
investment friendliness of sub-federal regulation, the issue still appears a major cause of
dissatisfaction among economic actors.
In the context of the general endeavour towards regulatory improvement, the federal
government has signed since December 2000 co-ordination agreements with twenty-nine
states, in which the states agreed to implement regulatory improvement programmes
similar to the one carried out at the federal level, and the federal government agreed to
provide them with technical assistance through COFEMER. The government has signed
similar co-operation agreements with 18 municipalities and is currently considering
co-operation with another 35 municipalities. This co-operation includes the development
of municipal guides on regulatory reform to assist with the establishment of independent
regulatory review authorities, the creation of registries of formalities, or the design of
effective enforcement schemes. It also entails co-ordination of state and municipal
formalities for setting-up businesses.
Sub-federal regulation has attracted significant criticism from the private sector
because of the additional formalities imposed on businesses, including with respect to
land use and sanitation, which seriously inflate the number of federal requirements for
setting up or operating a business. The Mexican government has tried to address these
concerns through joint work between COFEMER and local authorities, which has resulted
in the establishment of SAREs in 21 municipalities. It is estimated that, since the
establishment of the first municipal SARE in Puebla in May 2002, the programme has
encouraged the establishment of 17 513 new enterprises with an investment of over
75 million of dollars and the creation of more than 41 000 jobs. However, the situation is
fairly uneven among States and municipalities, with the average delay for launching a
business ranging in 2002 from 17 to 143 days according to the last yearly evaluation of the
quality of regulations produced by the Consejo Coordinador Empresarial (CCE).6 This variation
in regulatory quality, in parallel to other factors, such as the quality of infrastructure and
the availability of qualified labour, can affect state and municipal attractiveness as
locations for productive investment and business development. Despite considerable
improvement in states and municipalities that participate in the programme, the study
indicates that the Mexican average has only improved from 64 (data from the 1999-2000
evaluation) to 57 days (data from the 2002 evaluation) required to open a business. This is
due to the important percentage of states and municipalities that have not yet adopted
SAREs, so that the generalisation of the programme bears a very significant potential for
overall improvement at the national level.
Trade facilitation
The 1999 OECD report highlighted the important progress already achieved by Mexico
in the area of trade facilitation. In particular, the establishment of the Customs Integral
Automated System (SAAI) at the beginning of the ’90s has brought significant
transparency, predictability and simplification to the previous system, resulting in
efficiency gains both for businesses and for the government. The Customs clearance
process is since fully automated, based on an electronic statement by a Customs broker
prior to the entrance or departure of goods to and from Mexico. SAAI allows controlling
operations of all existing (48) customs offices and consolidating information about
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international trade operations which is used by governmental authorities, economic
operators and the Central Bank. The 1999 report noted the important gains this reform had
brought to trade operators in terms of clearance time and as a result of reduced temporary
storage, as well as to the government as regards improved revenue collection. Mexico has
sustained trade facilitation endeavours since that date.
SAAI has been modified several times through the years to adjust to the IT evolution
and incorporate the EDIFACT standards. Recently, a SAAI-M3 phase was started, with the
aim of achieving a paperless trading environment in the future. The SAAI-M3 includes
payment of customs duties, electronic transmission of deposit certificates, cargo shipping
lines manifests and remote systems. It also includes temporary importation for some
means of transport and certain carriers’ documents, such as through the Temporary
Importation Customs System (SAAIT) project for trailers and containers, which is now at
an early implementation stage.
SAAI has recently incorporated risk management information in order to determine
the shipments that will be subject to inspection. The incorporation of risk management
techniques was assisted by the creation of a specific training unit to improve techniques
for detection of high risk shipments. Although it is too early to judge the efficacy of the
system, it does promise important improvements both in terms of revenue collection and
of inspection rates and delays. Indeed, the mandatory use of Customs brokers in the
clearance process had had a modest impact on the delays at the border, since the broker,
bearing full liability for the shipment, usually carried out extensive inspections before
clearing through Customs.
However, SAAI does not yet incorporate electronic transmission of permits and health/
sanitary and phytosanitary certificates issued by the government, as well as carriers
documents, although this is part of the future projects of the Mexican administration.
Work to incorporate these aspects will bring the Mexican system much closer to a genuine
single window for trade procedures, with incontestable cost savings for the trading
community and efficiency gains for the administration. As these formalities involve
several different agencies, including Customs, the department of Trade, and sanitary and
phytosanitary authorities, co-ordination would be greatly facilitated if these formalities
were brought under the umbrella of the programme for simplifying business formalities
led by COFEMER.
A number of other steps were taken to further facilitate border procedures. For
instance, in March 2001 the ATA convention entered into force in Mexico, allowing for the
temporary entry of professional equipment, commercial samples and goods for fairs
and exhibitions on the basis of a guarantee by the Mexican International Chamber of
Commerce. This has relieved importers from the added expense of having to use brokers
for the clearance of temporary imports. Mexico has also developed and implemented
procedures to expedite express consignments according to the WCO guidelines, including
the possibility to use a company broker to accomplish customs formalities, or to cover
several merchandises for different consignees through a single shipment document. Most
importantly, Mexico has established a Customs Code of Conduct, based on the Arusha
Declaration Concerning Integrity in Customs, implemented since 2003 and supported by
integrity Action Plans. The proper compliance with the Code of Conduct and the Integrity
Action Plans will be regularly monitored by the Fiscal Administration to determine
whether the outcomes meet expectations or whether further action needs to be taken.
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Mexican Customs have also signed 58 public-private partnership agreements with the
most important industrial sectors (including textiles, automobiles and pharmaceuticals),
aimed at preventing smuggling, protecting revenue and providing for training. In addition,
they have introduced a Certified Companies Program, which offers reliable importers the
possibility of exemption from ordinary controls and clearance through simplified customs
procedures. Although trading companies found considerable interest in the program, their
participation is to date lower than expected, purportedly because of an unsatisfactory
balance between the benefits of the program and the requirements for qualifying under it.
Business associations have called for the simplification of the Program’s qualifying criteria
and for additional benefits, such as the possibility for on-site customs clearance for
exported goods.
Reducing the costs of regulatory diversity
The 1999 report offered a fairly positive assessment of the transparency governing the
elaboration of Mexican standards, noting significant action to address past complaints. By
contrast, the report found little progress with respect to the use of internationally
harmonised standards and the recognition of conformity assessment performed in other
countries, and had recommended intensifying efforts in these two directions. Five years
later progress remains quite modest and efforts are still warranted to bring this area in line
with international best practices.
Standard-setting
Since 1997, the Federal Law on Metrology and Standardisation (LFMN) requires
mandatory technical requirements (called Mexican official standards – NOMs) to be based
on corresponding international standards, unless these are considered inefficient or
inadequate for achieving the desired objectives. Government agencies elaborating NOMs
have to include an assessment of the degree of correspondence to international standards
and justify any divergence from them. The Law also encourages voluntary standards
(called Mexican standards – NMXs) to be based on international standards where efficient
and appropriate for achieving the desired objectives.
Despite these provisions, still today only 27% of existing NOMs is based on internationally
harmonised standards. Harmonisation appears most advanced in the area of communications
and transportation (55% of existing NOMs), while it is negligible in the area of agriculture (5% of
NOMs) or of tourism (no internationally harmonised NOMs). The main justification provided
by stand-setting agencies in accordance with the LFMN for the non-observance of
internationally harmonised standards is the specificity of the Mexican conditions, which
would call for specific technical requirements. However, some cases may also indicate Mexican
agencies which are insufficiently aware of existing international standards. This situation may
not only create barriers for access to the Mexican market but equally hinders the capacity of
Mexican products to reach successfully the international marketplace.
A stronger involvement in international standardisation activities should allow the
Mexican administration to ensure that the special considerations warranted by the
environmental, climatic and other conditions in Mexico are duly taken into account, while at
the same time NOMs are geared towards allowing Mexican producers optimal access to their
most important selling markets worldwide. On the other hand, the increasing involvement
of COFEMER and of the General Department of Standards in the Ministry of Economy with
standard-setting activities throughout the government should gradually improve the
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awareness in line ministries. The recent inclusion of NOMs to the scope of the regulatory
improvement programme and to the scrutiny of COFEMER, comes on top of the general
co-ordination of standardisation activities operated by the National Standards Commission7
and should help enhance the efficiency of the co-ordination process in the future.
More effective steps towards harmonisation could also be taken in the context of the
five-year review of all NOMs provided by the LFMN, or of the review of the effects of a NOM,
which can be requested by COFEMER or the National Standards Commission within one
year of its publication. It should be noted that the General Department of Standards is
involved in the elaboration process of NOMs by other departments of the Ministry of
Economy and in issuing comments to the draft NOMs of other Ministries, so as to ensure
that relevant international standards are taken into account. The Department also
provides information to line ministries on the existence of international standards, so as to
raise awareness among government officials.
However, the high percentage of purely domestic NOMs does not just suggest a poor
observance of internationally harmonised standards. Some of these NOMs are elaborated in
areas where no internationally harmonised standards exist, reflecting the importance of
standardisation activities with a regulatory (or mandatory) character in Mexico. The
proportion of mandatory versus voluntary standards is roughly 1 to 8 (780 NOM for
6 023 NMX), up from 1 to 10 in 1999, indicating an increasing tendency to regulatory
interventionism in the area of technical specifications. This is despite the clear indication in
the LFMN that NOMs should mainly cover requirements for safety, health, environmental
protection or related criteria, while quality (including best practices in the production
process, specifications, attributes, test methods, characteristics or prescriptions applicable
to a product, etc.) can only be specified through voluntary standards (NMXs).
Furthermore, in some cases, NOMs are referencing voluntary standards, with which
compliance becomes thus indirectly mandatory. A similar situation occurs with selfregulation by professional associations, for instance in the financial sector self-regulation
by the Colegio de Contadores that has been incorporated in financial regulations. This is
potentially problematic, since future changes in the referenced NMX or self-regulations
instruments are not subject to the full transparency and public consultation processes of
the Federal Administrative Procedures Law or the LFMN.
By virtue of the LFMN, voluntary standards (NMX) are elaborated by National
Standardisation Organisms (ONN) or by the Ministry of Economy in case there is none.
Voluntary standards are developed by the private sector through a formal co-ordinated
process in which key participants in a market reach a consensus. ONNs have to publish the
topics that will be subject to standardisation activities for the coming year in the National
Standardisation Programme (PNN) and to publish an extract of the NMX in the Official
Gazette when the standardisation work is concluded. However, NMX are not reviewed by
COFEMER and are not subject to prepublication in the Official Gazette.
Conformity assessment and accreditation
Overcoming past reluctance to entrust accreditation to the private sector, Mexico
formally established its first private accreditation entity, the Entidad Mexicana de
Acreditación (EMA), in January 1999. EMA operates as a non-profit organisation, composed
by representatives of all related sectoral bodies in the area of calibration, certification,
consumer protection, and self-sustained through accreditation fees and training. It is a
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member of IAF, ILAC, PAC and IAAC. By the end of 2001 EMA had accredited 35 bodies,
21 for quality assessments and 14 for product assessments. This is an important support
for Mexico’s increasing focus on quality certification. Mexico, through its national
development plan endeavours to promote adherence by SMEs to ISO 9000 quality criteria
as a means of enhancing domestic business competitiveness.
Certificates of conformity of imported goods with applicable technical regulations can
only be issued by a Mexican-based accredited conformity assessment body. However, the
Mexican government has granted recognition of equivalence of other countries’
conformity assessment procedures in the areas of wheel tires and vehicles identification
numbers and works to extent recognition of equivalence in other areas in the near future.
Competent authorities and conformity assessment bodies can also conclude agreements
for the mutual recognition of equivalence of conformity assessment results. If the
conformity assessment relates to voluntary standards the agreement will require an
accreditation by the National Accreditation Entity. For mandatory technical regulations it
will require in addition the approval of the Ministry responsible for that regulation. Such
agreements already exist under NAFTA on specific products of the automotive,
telecommunication and information technology industries.
Application of competition principles
Open borders and reduction of trade and regulatory barriers are insufficient to provide
real market access because any benefits derived from liberalisation and deregulation can
be countered or undermined by anticompetitive practices. As such, competition policy can
play a crucial role in determining the degree of market openness by contributing to shape
the overall market structure. Therefore, trade policies should be complemented by
effective enforcement of competition policy to ensure that all participants (foreign and
domestic) are granted real market access. Otherwise, a weak or ineffective competition
policy or lack of its enforcement can be tantamount to a trade barrier.
In addition, since trade and competition policies (or lack thereof) can have a significant
effect on the cost structure of the productive sector, (especially regarding two important
determinants of supply, i.e. the prices of essential inputs such as services and infrastructure,
and the availability and affordability of technology), liberalised trade and effective
competition regimes are crucial elements to increase the productivity and competitiveness
of industries.8 Therefore, in order to enable firms to compete in the international markets, it
is vital to undertake deep structural reforms that promote investment and competition
in essential service and infrastructure sectors which affect the economy as a whole,
i.e. electricity, transport and telecommunications. Allowing investment and enforcing
competition in these sectors, will make them more efficient and competitive, which in turn
will contribute to Mexico’s overall economic growth and development.
In general terms, Mexico can be considered to have an open economy and an adequate
competition policy. The 1999 Report concluded that Mexico’s competition law reflected a
well-conceived synthesis of contemporary economic principles and that the Federal
Competition Commission (Comisión Federal de Competencia or CFC) possessed the enforcement
powers and authority to determine whether the absence of effective competition warranted
regulatory intervention by the government. However, the Report also noted, that there was
no clear base of support for competition policy and that the vigour of the Competition
Commission’s enforcement record to that point could be questioned.
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Today, Mexico’s competition regime has evolved. Important developments have been
made since 1998 and the CFC has made reasonable progress in its efforts to address
anticompetitive behaviour.9 However, the recent 2004 OECD Report mentions that the CFC
still confronts an array of challenges and opportunities for improvement. For example, the
Report states that there are deficiencies in the statutory authority and judicial review
processes that constrain the CFC’s ability to address anti-competitive conditions effectively
and efficiently. Indeed, a number of problems and concerns are still perceived in some
areas and this leads some parties to believe that the CFC has little or no real power to
effectively redress certain pervasive anticompetitive situations. Some of these concerns
are highlighted below.
The CFC has limited powers to address certain market access problems in regulated
sectors because of the division of competencies between regulatory agencies. The
competition law does not expressly deal with the problem of abuse of dominance and
sector-specific market conditions as such are addressed in specialised sectoral laws and
regulators. Although the Commission can give opinions and issue determinations of
ineffective competition in regulated sectors, in practice it has a limited role to enforce such
opinions because the ultimate decision rests in the sectoral regulator who may not always
take the CFC’s opinion into account10 or may sometimes lack sufficient powers itself to
enforce such determinations. This situation is aggravated with the additional problem
(addressed below) that derives from the abuse of judicial review (amparo) by private parties.
For example, regarding the transport (railroad networks) and telecoms sectors if the
parties concerned do not reach an agreement on the conditions and rates of access or
interconnection to the corresponding network, the regulator has to intervene and set the
rate and conditions. However, in practice, some decisions have not been effectively
enforced, either because of insufficient powers of some regulators or because of ongoing
and pending litigation. In the telecommunications sector, regarding the issue of
dominance, attempts by the regulators to address the anticompetitive behaviour of Telmex
(the incumbent and de facto structural monopoly) have been unsuccessful, partly because
Telmex has consistently challenged and appealed the actions and resolutions of the CFC
and the Telecommunications Commission (COFETEL).
Additional problems in this sector are illustrated in the far-reaching and long-standing
telecommunications dispute involving Telmex, and the long distance US carriers AT&T and
WorldCom (affiliated in Mexico to Alestra and Avantel, respectively). The problems and
consequences derived from the complex situation in the telecommunications sector
prompted the US to seek redress in the international arena, before the WTO.
In its Request for Consultations, the US argued that Mexico, inter alia, adopted or
maintained anti-competitive and discriminatory regulatory measures; tolerated certain
privately-established market access barriers; and failed to take needed regulatory action in
the basic and value-added telecommunications sectors.11
On 2nd April 2004, the WTO Panel handling this dispute issued its Report and, among
other things it resolved that Mexico: a) failed to ensure that a major supplier (Telmex)
provide interconnection at cost-oriented rates to United States suppliers for the crossborder supply; b) did not maintain “appropriate measures” to prevent anti-competitive
practices; c) failed to ensure access to and use of public telecommunications transport
networks and services on reasonable terms to United States service suppliers for the crossborder supply; and d) failed to ensure that United States commercial agencies have access
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to and use of private leased circuits within or across the border of Mexico, and are
permitted to interconnect these circuits to public telecommunications transport networks
and services or with circuits of other service suppliers. On the other hand, the Panel also
found that Mexico did not violate: Section 2.2(b) of its reference Paper, and Sections 5(a)
and 5(b) of the GATS Annex on Telecommunications, all with respect to cross-border
supply, on a non facilities basis in Mexico. The Panel therefore recommended that the
Dispute Settlement Body request Mexico to bring its measures into conformity with its
obligations under the GATS.12
On 1st June 2004, the Dispute Settlement Body adopted the Panel Report. Although
Mexico expressed some reservations about the Panel’s findings and recommendations, it
did not appeal the decision. Instead, Mexico and the US reached an agreement on actions
to be taken in order to comply with and implement the Panel’s recommendations.13
Other competition problems (e.g. barriers to entry) may arise where regulations or
regulators establish a limitation on the number of competitors that can participate in a
given sector. One example of this can be typically seen in the banking and financial sectors.
Another example of regulatory barriers to entry can be found in the area of customs, where
the import registration and license requirements (padrón de importadores) can effectively
limit the number of competitors.
Some of the above mentioned problems could be addressed by establishing clearer and
binding mechanisms of co-ordination and collaboration between the CFC and the relevant
regulators to ensure that the CFC’s opinions and determinations are taken into account
and anticompetitive situations in regulated sectors can be effectively solved. Likewise, the
CFC should have a more active and binding role in proposing or recommending changes in
legislation to address the problems of structural monopolies.
Some of the first steps in this direction have been taken recently by through different
co-operation initiatives between the CFC and COFEMER, COFETEL, and the Energy
Regulatory Commission (CRE). However, it is too soon to determine the actual effects of
these co-operation efforts so their evolution should be closely monitored in the future.
Finally, a problem that must also be addressed is Mexico’s judicial review (amparo)
system, which has horizontal and far reaching consequences beyond market openness.
Due to the excessive use of this mechanism in litigation, many parties are left without
effective remedy or redress, even against the most notorious anticompetitive scenarios.
In the end, although anticompetitive behaviour has had an effect on market access for
foreign firms (e.g. in the Telmex case), it must be stressed that anticompetitive practices,
especially those relating to essential inputs (e.g. telecommunications), also have a
significant effect on the cost structure of domestic firms and therefore, correcting these
market failures should not be deemed as beneficial only for foreign firms. Indeed, domestic
firms will also benefit from the elimination of anticompetitive behaviour, increasing their
competitiveness and benefiting the economy as a whole.
Conclusions and policy options
Mexico has made significant progress in further enhancing the market opening
orientation of its regulatory framework since the publication of the 1999 Report. Mexico
has engaged in a comprehensive approach to liberalisation by combining the pursuit of
trade liberalisation at the multilateral, regional and bilateral levels with further steps
towards market friendly regulatory reform at the domestic forum. Although Mexico’s
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international activity was significantly centred on the negotiation and conclusion of FTAs
and preferential agreements, an important number of the provisions contained therein
have been multilateralised. In areas such as foreign investment, services, standards and
deregulation, regional initiatives tended to have a strong liberalising influence on Mexico’s
general trade and investment policies thereby benefiting third parties.
As discussed in previous sections, most of the recommendations made by the OECD in
the 1999 Report were acted upon quite successfully. The recommendations contained in the
following section are aimed at suggesting avenues for further improvement, so as to allow
the Mexican economy to continue benefiting from trade liberalisation and open markets.
Policy recommendations
●
Push forward with structural reforms which are of the outmost importance for
promoting investment and competition in essential service and infrastructure sectors
crucial for productivity and competitiveness.
●
Continue efforts to improve the intra-governmental co-ordination between government
agencies with respect to regulations and practices affecting market openness. Further
improve the coherence between the regulatory framework in the telecommunications
sector and Mexico’s international obligations.
●
Include fiscal formalities in the Federal Regulatory Improvement Programme, so as to
take steps for their streamlining and simplification.
●
Pursue the simplification of formalities at the state and municipal level. Expand the
SARE program to other states and municipalities.
●
Continue the incorporation of risk management techniques in the SAAI system.
●
Further enhance endeavours towards paperless border procedures and the creation of a
single window for trade formalities. Incorporate the electronic transmission of permits
and health/sanitary and phytosanitary certificates into the SAAI. Bring all the border
formalities required by Customs and other concerned government agencies under the
coverage of the programme of simplification of business formalities.
●
Carry on with the implementation of the Customs Code of Conduct.
●
Improve the business-friendliness of the Certified Companies Program.
●
Boost efforts to enhance the use of internationally harmonised standards. Use the
process of the five-year review of NOMs to improve the awareness of standard-setting
agencies and take further steps towards harmonisation.
●
Reconsider the increasing tendency towards mandatory norms in preference to
voluntary standards.
●
Improve the co-ordination between the CFC and sectoral regulators.
●
Revisit the judicial review (amparo) system.
Notes
1. Insurance and bond companies, foreign exchange firms, general deposit warehouses, financial
leasing companies, financial factoring companies, limited scope financial institutions and
retirement fund management companies. However, the financial legislation opens the possibility to
foreign investors to participate in a greater percentage in the capital stock of these companies
provided they are established as “affiliates” of foreign financial institutions in the terms and
conditions set out in the international agreements signed by Mexico and in the Mexican legislation.
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2. Coastal, fresh water and in the Exclusive Economic Zone.
3. Integral port administrators, port pilot services, commercial exploitation of vessels engaged in
cabotage and internal water transportation services, except for tourist cruisers and the
exploitation of dredges and naval devices used for the building, maintenance and operation of
ports in which FDI may participate up to 100% and supply of fuel and lubricants for vessels.
4. Approximately USD 150 million in 2004.
5. Without taking into account cases related to anti-dumping or customs valuation, these are: 2000,
WT/DS203, Measures Affecting Trade in Live Swine (brought by the USA); 2000, WT/DS204, Measures
Affecting Telecommunications Services (brought by the USA); 2001, WT/DS232, Measures Affecting
the Import of Matches (brought by Chile); 2003, WT/DS284, Certain Measures Preventing the
Importation of Black Beans from Nicaragua (brought by Nicaragua); 2004, WT/DS308, Tax Measures
on Soft Drinks and Other Beverages (brought by the USA).
6. Centro de Estudios Económicos del Sector Privado, Consejo Coordinador Empresarial “Calidad del
marco regulatorio en las entidades federativas mexicanas”. The comparative study for 2002 was
published in September 2003.
7. The National Standards Commission, established by the LFMN is composed by representatives of
line ministries, including in the areas of natural resources and fisheries, energy, transport and
communications and health, representatives of professional associations, national standardisation
organisms and consumers.
8. Anticompetitive practices can contribute to increase the prices of the input good or service used by
the downstream industry. This increase in the prices of inputs will lead to an increase in the
production costs of the affected firms, which in turn will decrease the firm’s overall competitiveness
because the price of the intermediate or final good or service provided is likely to be higher (i.e. less
competitive) than that of other (often foreign) competitors who may not be affected by these
anticompetitive practices and may thus have a lower cost structure.
9. For specific details, see the 2004 Report on the Review of Mexico’s Competition Law and Policy,
DAFFE/COMP(2004)1.
10. See page 19, paragraph 61 of DAFFE/COMP(2004)1.
11. See WTO document WT/DS204/1, 29 August 2000, page 2.
12. See WTO document WT/DS204/R, 2 April 2004, pages 224-226.
13. The main features of the agreement are the following: i) Mexico will remove the provisions of
Mexican Law relating to the proportional return system, uniform tariff system, and the requirement
that the carrier with the greatest proportion of outgoing traffic to a country negotiate the settlement
rate on behalf of all Mexican carriers for that country. Both countries believe that the elimination of
these provisions will allow the competitive commercial negotiations of international settlement
rates; ii) Mexico will allow the introduction of resale-based international telecommunications
services in Mexico by 2005, in a manner consistent with Mexican law; and iii) The United States
recognizes that Mexico will continue to restrict International Simple Resale (use of leased lines to
carry cross-border calls) to prevent the unauthorized carriage of telecommunications traffic).
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OECD Reviews of Regulatory Reform: Mexico
Progress in Implementing Regulatory Reform
© OECD 2004
Chapter 4
Regulatory Agencies in Mexico:
the Case of Energy, Water,
Financial Services
and Telecommunications
This chapter analyses governance arrangements for four regulatory agencies in
Mexico, dealing with vital economic sectors: water, energy, telecommunications and
financial services. The chapter sets the agencies in their economic and historical
context, analysing in detail their functions, powers and institutional design. This
leads to stressing the need for independence and accountability and for a clear
decision-making framework.
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4. REGULATORY AGENCIES IN MEXICO: THE CASE OF ENERGY, WATER, FINANCIAL SERVICES AND TELECOMMUNICATIONS
INTRODUCTION
This report focuses on four regulatory agencies, the COFETEL (Comision Federal de
Telecomunicaciones), the CNA (Comision nacional del Agua, or CNA), the CNBV (Comision nacional
Bancaria y de Valores) and the CRE (Comision Reguladora de Energia). These four agencies play an
important role in key sectors of the Mexican economy, respectively, the telecommunications,
water, financial services and energy. These represent key infrastructure sectors that are vital
for Mexico to fully realise its potential for strong long-term economic growth and to improve
the living conditions of its citizens. While Mexico has a fairly developed financial sector and a
modern system of telecommunications, access issues remain for part of the population. Water
is a fundamental resource in a country where 80% of the population live in relatively dry and
hot areas and where subterranean resources are being progressively exhausted. In spite of
significant natural resources in terms of oil and gas, lack of investment in infrastructure still
hampers the development of the energy sector, and in particular the increase in the production
and distribution capacity for energy.
The Mexican regulatory agencies have been established following a historical process,
as in many other OECD countries. The CNA was set up at the end of the 1980s, in an
attempt to change the structural management of water, and to clarify the relationships
with the users, including those in the agricultural sector. The CNBV in its current form
emerged as a result of the financial crisis of the mid 1990s, while the CRE emerged and was
consolidated following the timid opening of energy markets realised in the beginning of
the 1990s. Finally, the COFETEL was set up six years after the privatisation to oversee the
progressive opening of the telecommunications market.
Mexico, as many other OECD countries, is grasping with the difficulty of setting up
independent regulators. These agencies have their place in the impressive structural
transformation of Mexico’s administrative and regulatory capacities. However, they
originate in an administrative, institutional and legal system characterised by strong
ministerial power within a presidential administration.
The purpose of this report is to analyse the governance of these four regulatory
agencies in a wider context.1 First, the report analyses the challenges faced by Mexico in
the four economic sectors, before turning to the institutional design of the agencies. The
report examines the balance between independence and accountability in section
Independence and accountability of regulatory authorities, the horizontal design and functions
of the various agencies in section Horizontal design. Section Powers for high quality regulation
discusses the powers of the regulatory bodies and section Assessing the performance of
regulatory authorities the practice of performance assessment. In conclusion, the report
introduces a number of policy options.
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Designing independent regulators, a common challenge
Independent regulatory authorities across OECD countries
Independent Regulatory Authorities pose unique problems and challenges. They
represent one of the most widespread institutions of modern regulatory governance,
operating at arm’s length from line ministries or even the executive power (Box 4.1). They
create significant challenges in many democratic institutions, as they represent a sort of
“non majoritarian” institution, embodied in the executive, but not necessarily under the
direct hierarchical authority of Ministers.2 Usually, they are implemented in connection
with the privatisation of former state-owned enterprises, when establishing competition
in formerly monopoly based industries, such as energy and telecommunications, and in
other sectors where sector-specific prudential oversight is needed such as financial
services (see Figure 4.1). As such, they differ from other agencies, and need specific
governance and institutional structures to be fully effective. This is part of building a
regulatory State, one in which the function of regulation is distinct both from the policymaking function and from the ownership function.
The Mexican model of “deconcentrated authorities”, seems in first instance to be
linked to the modern public management agenda, which acknowledged the need for
decentralised management. This agenda led countries to establish agencies with a
differentiated governance structure, in order to “improve the efficiency and effectiveness
Box 4.1. Independent regulators in the OECD work on regulatory reform
Independent regulators have been considered in various ways as part of the OECD
Work.1 This was reflected early on in the OECD 1997 Recommendations, which advised
governments to, inter alia “Create effective and credible mechanisms inside the
government for managing and co-ordinating regulation and its reform”. In its reviews of
regulatory quality the OECD (2002d) “welcomed the move to establish independent
bodies”, because this trend offers great potential to improve regulatory efficiency.
Specialised and more autonomous regulators are likely to yield faster and higher quality
regulatory decisions and are characterised by more transparent and accountable
operations. Where they have been most effective and credible, their independence and
roles have been based on a distinct statute with well-defined functions and objectives.
However, in light of the risks mentioned above, it is crucial to address key institutional
design issues in order to reap the full anticipated benefits of setting up independent
regulators. This has led to a call for “comprehensive reviews of the independent regulatory
bodies to identify problems and develop consistent solutions. More work by the OECD to
monitor and assess best practices in designing these important regulatory institutions is
intended to assist countries in ensuring that they yield the expected benefits in market
performance while respecting norms of transparency and accountability”.2
1. OECD (2002), “Improving the Institutional Basis for Sectoral Regulators”, Journal of Budget and Management,
Paris. OECD (2002), Distributed Public Governance: Agencies, Authorities and other Government Bodies,
PUMA, Paris. OECD (1999), Hewitt, B. (1999), The relationship between competition and regulatory authorities,
Journal of Competition Law and Policy, No. 1, 3, pp. 169-246, “Relations between regulators and competition
agencies”, Competition Policy Roundtables, No. 22, Paris. OECD (2000), “Telecommunications regulations:
institutional structures and responsibilities”, DSTI/ICCP/TISP(99)15/Final, Paris, 25 May. International Energy
Agency (2001), Regulatory Institutions in Liberalised Electricity Markets, OECD/IEA, Paris. Recent work
undertaken by the IEA include: "Regulatory Reform in the Electricity Supply Industry: An Overview",
C. Ocaña, August 2002.
2. See OECD (2002d).
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4. REGULATORY AGENCIES IN MEXICO: THE CASE OF ENERGY, WATER, FINANCIAL SERVICES AND TELECOMMUNICATIONS
Figure 4.1. Independent regulatory agencies (IRA) in EU member States,
Norway and Switzerland
IRAs in economic regulation
IRAs in social regulation
Telecom
Food safety
Financial markets
Competition
Environment
Number of IRAs
18
Number of IRAs
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
1970
1975
Pharmaceuticals
Electricity
1980
1985
1990
1995
2000
0
1970
1975
1980
1985
1990
1995
2000
Source: Gilardi, 2003.
of government entities with specialised functions”, and also “improve the legitimacy and
expertise of decision-making”. These agencies, in various forms, play a significant role in
OECD countries, with up to 131 executive agencies and 1 035 non-departmental bodies in
the UK, 300 central agencies in Sweden and 79 crown entities in New Zealand (OECD,
2002c). While some of these agencies have a purely managerial function, others are in fact
exerting supervisory or regulatory functions.
Supervisory or regulatory functions often involve setting up independent regulators,
in order to protect market interventions from direct short term political interference in
regulatory matters and also from the influence of specific private or public interests, such
as those of the regulated firms. Independence is expected to go hand in hand with
transparency, stability and expertise.
The economic benefits of opening markets, in terms of domestic and international
investment, and also in terms of consumer surplus through lower prices, have been greatest
in the sectors where independent regulators have been set up, though the causality remains
ambiguous, due to rapid technological change. However, technological change itself is also
influenced by the regulatory structure in a dynamic evolving equilibrium.
Independent regulatory authorities need proper institutional design as well as a strong
governance framework to generate the expected benefits of a high quality regulatory
framework. Independent regulatory authorities are not without risk, however. In some
cases, independent regulators set up for a narrow sector may “slow structural change”, or
obstruct the governance across sectors. They are also at risk of becoming captured by their
sector and their regulatees, losing the sense of a broader market vision. This is particularly
true when their oversight is limited to one aspect of a market, or one segment. Their
relationships with competition authorities need to be carefully designed, as a risk of
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fragmented governmental policies and actions exist, with corresponding failures due to
the lack of coordination. The implications of independence are also not always fully
appreciated. Independence brings with it a number of procedural requirements, and a
system of checks and balances. An efficient system for judicial review, one that does not
paralyse the action of regulators, is also an important element of proper accountability. All
these factors call for great care and attention when designing and implementing these
bodies, as well as for the need of performance assessment and periodic review.
The Mexican regulatory authorities in the context of economic modernisation
The Mexican economy embarked on an ambitious modernisation programme at the end
of the 1980s, involving privatisation, liberalisation and opening of various sectors of the
economy. In this context of change, the pace of reform of sectoral regulators has not always
matched the pace for modernising the economy, the regulatory framework or the public
administration as a whole. For example, the financial crisis of 1995 was one of the factors
that contributed to the merger of regulatory authorities that gave birth to the CNBV. The
COFETEL was established after the privatisation and at a further stage of market opening.
The traditional administrative organisation in Mexico is based on direct authority
exerted by the Ministers on all the bodies or units under their responsibility (Cortes
Campos et al. 2002). This distinguishes Mexico from other countries with a system of
protected autonomy, involving constitutional autonomy and decentralisation. Article 90 of
the Constitution explicitly defines the centralised nature of the Federal Administration.
The Constitution refers to a specific organic Law (Ley Orgánica de la Administración Pública
Federal of 1976) that governs matters related to the administrative order. Article 17 of this
law promulgated in 1976 states that:
Secretaries of State and administrative departments may count on deconcentrated
administrative bodies in order to deal in the most efficient and expeditious way with the
matters of their responsibility, which will be hierarchically subordinated to them, and
have specific faculties to solve issues on matters and within a territorial sphere of activity
to be defined in each case, while conforming with the legal arrangements applicable.
The deconcentrated bodies created by this law originate in the 1970 public
management reforms which aimed at increasing administrative efficiency through
managerial deconcentration. The deconcentrated authorities have been gradually
implemented in this framework, while searching for increased autonomy, particularly
during the last three administrations (Salinas, Zedillo, Fox). The relative situation of the
various regulatory agencies reflects a fairly heterogeneous institutional design.
The introduction of regulatory authorities which may have some jurisdictional,
administrative or secondary rule-making functions is not always easy. Mexico currently
lacks a distinction between “Agencies”, which are simply deconcentrated or decentralised
parts of a central public administration and “Independent Regulatory Authorities” (IRAs).
IRAs are specific institutions entrusted with regulatory powers, granted with institutional
independence and charged with implementing regulation. This is a core aspect and a
starting point for this report. As a result, the Mexican bodies face significant difficulties in
exerting some of the powers that have been devolved to them.
The hierarchical subordination implies technical autonomy, but not organic
autonomy, administrative or financial autonomy (Campos et al., 2002). These agencies may
have been conceived as a reserve of “intellectual power” externalised from the ministries.
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They have generally been created either through laws or decrees without a whole of
government perspective.
The legal instrument chosen to create a deconcentrated body determines its legal
mandate:
●
Under administrative delegation, the bodies created by secondary regulation can be
considered as a dependency of the Executive, managing internal aspects of its
administration.3
●
Under legislative delegation, the bodies may enjoy original faculties and attributions as
allowed in the law, involving some regulatory power.
In theory, the second category should correspond to the notion of a decentralised body in
the Mexican administrative framework, but it has also been used for deconcentrated regulatory
authorities. According to the original 1976 Law a deconcentrated administrative body is part of
the central administration, with a specific mandate decided on a case-by-case basis, and
enjoys technical and operational autonomy. This body has more freedom or independence than
other administrative bodies in day-to-day activities, but remains ultimately subordinated to a
Ministry in terms of its property and budget and does not have legal personality. The second
category, initially intended for the decentralised bodies, puts them as part of the public
administration at large, with a legal personality and property, and a greater level of autonomy.
This category includes PEMEX and the CFE. It entails a greater degree of management
autonomy, although in practice they have to take into account the positions of the ministries.
In the recent period, an increasing number of “atypical bodies” has been created on an ad hoc
basis, which does not fall under the standard categorization of the 1976 Law. These agencies
were created by law, and were given some independence, though usually not in budgetary or
legal matters. These laws can also depart from the framework of the 1976 Organic law, since an
Organic Law is not really superior to any other law issued by the Congress.
In theory, three options exist for offering a legal setting to a regulatory authority in the
Mexican institutional framework:
●
A deconcentrated authority.
●
A decentralised authority.
●
A special body with constitutional basis.
The four authorities examined in this report fall in the first category. Other authorities
belong to the category of decentralised authorities (see Box 4.2). Special bodies with a
specific constitutional setting are also a possibility, particularly in cases when human and
civic rights need to be protected, such as is the case with the IFE, (Instituto Federal Electoral),
and the CNDH (Comision Nacional de Derechos Humanos). The constitutional framework
provides the strongest guarantees for independence.
A brief overview of the four regulatory agencies
The four agencies selected for the study cover only a fraction of the existing bodies in
Mexico (see Annex B, General Description of the Four Mexican Regulatory Agencies). Most of
them are in charge of economic regulation with economy-wide implications, ensuring
economic and competitive aspects of market functioning in liberalised sectors.4 The CNA
differs as it has a double environmental and economic function. The environmental
function is to monitor risk and protect the environment while the economic function is to
support and manage access to water in a country where this is a key issue.
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Box 4.2. Deconcentrated and decentralised authorities
in the Mexican context
A wide number of agencies, considered as “Deconcentrated or Decentralised Authorities”*
exist in Mexico, performing a wide range of functions, some of which are of a regulatory
nature.
Financial sector
Condusef* – Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios
Financieros.
Consar – Comisión Nacional del Sistema de Ahorro para el Retiro.
CNSF – Comisión Nacional de Seguros y Fianzas.
IPAB* – Instituto para la Protección al Ahorro Bancario.
CNBV (1995), Comision nacional Bancaria y de Valores.
Agricultura
Conapesca – Comisión Nacional de Acuacultura y Pesca.
Senasica – Servicio Nacional de Sanidad, Inocuidad y Calidad Agroalimentaria.
Health
Cofepris – Comisión Federal para la Protección contra Riesgos Sanitarios.
Economy
CFC – Comisión Federal de Competencia.
PROFECO – Procuraduría Federal del Comsumidor.
IMPI* – Instituto Mexicano de la Propiedad Industrial.
COFEMER – Comisión Federal de Mejora Regulatoria.
Environment
CNA – Comisión Nacional del Agua (1992).
Profepa – Procuraduría Federal de Protección al Ambiente.
Conafor* – Comisión Nacional Forestal. Energy.
Energy
CRE – Comisión Reguladora de Energía (1993, 1995).
Conae – Comisión Nacional para el Ahorro de Energía.
Conasenusa – Comisión Nacional de Seguridad Nuclear y Salvaguardias.
Communications and transport
COFETEL – Comisión Federal de Telecomunicaciones (1996).
ASA* – Aeropuertos y Servicios Auxiliares.
Capufe* – Caminos y Puentes Federales.
Education
Conaculta – Consejo Nacional para la Cultura y las Artes.
INBAL – Instituto Nacional de Bellas Artes y Literatura.
INDA – Instituto Naciona l del Derecho de Autor.
INAH – Instituto Nacional de Antropología e Historia.
CONADE – Comisión Nacional del Deporte.
Administrative transparency
IFAI – Instituto Federal de Acceso a la Información Publica.*
* Decentralised administrative body.
Source: COFEMER 2004.
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Three agencies, CNBV, CRE and CNA, have been explicitly defined by law, but this is
not the case for the COFETEL, which is mentioned in a transitory article of the
telecommunication law, and is set up by a Presidential decree. Several agencies were
created in the 1990s, either following a systemic failure and a need to strengthen the
supervisory framework, such as the CNBV, or to accompany the modernisation and
liberalisation of the sector, such as for energy. The CNA has a longer history which dates
back to the 1920s and 1930s. Whereas most agencies are relatively small bodies reporting
to a wider Ministry, the CNA’s size is equivalent to a Ministry, and is several times larger
than the Ministry of Environment.
Recent trends and the pressure for change
Recent trends in the governance framework
The Mexican governance framework is undergoing significant changes. Nevertheless,
reforms have not yet touched upon the framework which defines the current autonomy
level and the accountability of regulatory agencies. These remain embedded in the
traditional Mexican framework for autonomous agencies, with limited scope for
independence and strong powers. The 2000 Federal Administrative Procedure Law (LFPA)
ensures that federal regulatory processes are subject to quality standards, with
implications in terms of transparency, communication and openness for all regulatory
agencies (see Chapter 2). The more recent reforms have adopted a more ambitious
approach in terms of setting up independent agencies for other issues. This was the case
when creating the electoral watchdog (Institute Federal Electoral, IFE) or the transparency
institute (Instituto Federal para el Accesso a la Informacion Publica, IFAI). The context created
by the 2000 election led to further reforms. The 2002 Ley Federal de Responsabilidades
Administrativas de los Servidores Publicos defines more precisely the duties, responsibilities
but also protections of civil servants. In spite of the positive aspects of the law, it had
unexpected negative repercussions on the powers of the regulatory agencies. The law
implies a personal financial liability for civil servants who make a decision affecting the
financial situation of the public sector or regulated entities. This reduces the power of
regulatory authorities when regulating public entities such as CFE, PEMEX or LFC.
This situation is compounded by difficult judicial issues. Many middle income and
developing countries, face significant difficulties in building market institutions and
judicial systems.5 The international comparisons6 show that Mexico appears to be
performing better than many middle income countries, but is still significantly behind the
best OECD performers in terms of the cost of resolving disputes or the time needed to
enforce contracts. The complexity and number of procedures is among the highest across
the countries included in those comparisons. This may be very problematic in a country
which is trying to tackle corruption.7 The amparo procedure analysed in this report had
a significant impact on the regulatory framework as a whole, particularly in the
telecommunications sector.
The need for reforming regulatory agencies
Modernisation and the immersion of the Mexican economy into international
networks have shown the need for reforming the regulatory agencies. It has also been at
the forefront of past assessments by the OECD, as well as the World Bank.8
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A new international context
The Mexican economic system has been deeply transformed by economic reforms,
privatisation, opening to trade, and liberalisation of core market activities, started at the
end of the 1980s. These reforms, involving participation in the WTO and also in NAFTA,
have had a significant economic impact, challenging the traditional organisation of the
Mexican state. However, many of these structural reforms could yield greater benefits.
Gaps in the current regulatory framework appear to play a role as indicated by the
concentration of economic power after the privatisation process and several perceived
abuses of some privatised firms.9 The opportunity cost of these shortcomings is becoming
increasingly clear, particularly when trading with large competitive economies such as the
United States or Canada. This is made more acute as competition intensifies in global
markets. Mexico increased its market share of US imports from 4.8% in 1996 to 11.8%
in 2002. However, early in 2003, its market share began to dip slightly.
European countries have faced similar challenges in some ways on their way towards
establishing a Single Market. European Directives have established clear guidelines for
energy and telecommunication regulation. Countries cannot build a common integrated
market without adopting a common approach to ensure market discipline in core sectors
of the economy.
In telecommunications, privatisation certainly eased some of the supply constraints
and quality issues experienced in the 1980s, as the waiting time for telephone installation
declined from 6 months to one day. Competition is now observed in all telecommunications
services. Mexico, as in many other countries which have privatised a previously state-owned
telecommunications company, has a strong incumbent. Mexico currently has a low mobile
and fixed line density, and high business telephone charges relative to other OECD countries
and adjusted for purchasing power parity (Communications Outlook 2003).10 Mexico still
faces the challenge to increase penetration of telecommunications services in a
competition-driven environment. Telecommunication services play a key role as a factor
stimulating growth in the long term as demonstrated by the OECD Growth Study
(OECD 2003). High telecommunication prices are affecting consumer surplus, which can be
increased by reducing those prices.11 Issues regarding the international settlement
system have resulted in disputes with the United States Trade Representative over
telecommunication issues within the WTO (see Chapter 3).
In the energy sector, the regulatory framework does not provide for open access and
interconnection to the grid of private generators. Capacity constraints, high prices and
short interruptions of service hamper the competitiveness of Mexican businesses. In the
water sector, Mexico is rapidly depleting some of its essential water resources and access
to water is increasingly becoming an issue in some of the most active and industrialised
parts of the country.
These opportunity costs which could be significant if the economy had remained closed,
become aggravated in a widely-open economy. Several sectors which represent significant
bottlenecks for increasing Mexico’s long-term growth potential should instead help to
significantly improve the well-being of current and future generations of Mexican citizens.
The recommendations from past reviews
These difficulties have already been identified by a number of reviews produced by the
OECD as well as other international organisations (see Annex C, Recommendations from Past
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OECD Reviews). The 1999 OECD report on regulatory reform in Mexico had already identified the
need to launch a comprehensive independent review of the regulatory agencies, to
increase competition in regulated sectors and to review the regulatory aspects of local
infrastructure, including water. Numerous recommendations had been made for
telecommunications, including reinforcing the powers, independence and authority of the
COFETEL. Since the 1999 review, no significant major changes have been implemented in
terms of the governance aspects. However, a new Decree and a “Reglamento Interior” are
about to be enacted in the telecommunication sector. Their effects would be to redistribute
some of regulatory functions, to clarify some of the grey area of responsibilities between
COFETEL and the Ministry (SCT), to establish fixed and staggered terms for the
commissioners and to give the COFETEL the power to impose sanctions. This would
respond in part to the observations of the 1999 OECD report in its telecommunication
chapter. The COFEMER also commissioned research to investigate the roots of the
regulatory agencies in the Mexican legal and institutional system.12
The recommendations of the 1999 review can also be complemented by other recent
OECD reviews, such as the 2002 and 2003 economic surveys, which mention the need for an
appropriate regulatory framework for network industries. The 2002 survey notes the need for
better coordination of the financial sector regulatory agencies, and reinforcing their
independence. The 2003 survey underlines the need to strengthen the authority of the
COFETEL in the telecommunication sector, as well to use economic instruments to ensure a
sustainable water supply reverting the current trends in the water sector. Strengthening the
regulatory framework in the water sector was mentioned in the OECD environmental review
(1998), recommended better enforcement of regulations, concessions and permits. The new
Environmental review (2004) called for increased water efficiency. Finally, the (2004) review of
Competition Policy addressed the amparo issue as well as the relationships between the
Competition Authority (CFC) and the sectoral regulators.
CURRENT TRENDS AND CHALLENGES IN THE FINANCIAL, WATER, ENERGY
AND TELECOMMUNICATION SECTORS
The four agencies in the study operate in key sectors of the Mexican economy. Clear
constitutional requirements determine the scope of public intervention in the energy and
water sectors. The potential shortfall in infrastructure investment is an important strategic
element when considering these sectors. In the telecommunication sector, a first stage of
privatisation and limited market opening created a powerful incumbent, which was designed
to allow for network modernisation and for deploying national objectives. The regulatory
agency, COFETEL, was established six years later. This meant that COFETEL would have to
regulate the incumbent in a further stage of liberalisation. The financial sector underwent
major changes in the aftermath of the peso crisis in the mid 1990s (Ramirez 2001). This chapter
will assess how the existing regulatory framework has been able to address these challenges in
order to provide additional incentives for investment and growth.
The financial sector
The Mexican financial system: an overview of recent trends
The Mexican financial system mainly involves banking activities. Financial markets
are more recent and less developed (Garcia Rocha, 2004). Mexican banks were nationalized
in 1982, following the debt crisis; the sector underwent a process of consolidation over the
following years and most banks were privatised in 1991-92.13 Privatization was carried out
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with a short term focus on maximizing short-term revenues, and generated the equivalent
of 3.5% of GDP for public finances.14 The system was highly regulated until 1988, with
administered credits and rates, and specific lending institutions for various parts of the
economy. In 1990, the system opened up to full multiple banking operations. In 1991-92,
banks were privatized rapidly, one being sold after the other, every three weeks. Entry
barriers for domestic investors were eliminated (those for foreign investors remained,
however). But the regulatory/supervision framework was not strong enough, accounting
standards were inadequate and the lack of transparency hid the true financial situation of
banks. As in many other OECD countries, financial sector liberalisation was followed by a
boom-bust cycle characterised by a deterioration of credit quality and bank failures.
Unrestrained competition with a lack of experience in assessing risks,15 and multiple risks
in a more complex universal banking framework led to rapid increases in credit lending,
with an annual rate of increase in lending of 25% between 1988 and 1994. This increase in
lending was accompanied by a rapid growth in consumption and a deterioration of the
current account, with a yearly deficit of 6 to 7% of this account every year between 1992
and 1995. The quasi-fixed exchange rate regime that prevailed amplified the crisis,
particularly as there was resistance to an increase in interest. The weak regulatory
framework was unable to control excessive risk-taking by banks.
This was clearly unsustainable and led to a crisis in 1994, with major macroeconomic
repercussions. GDP fell by 6.2%, and the currency was devalued by nearly 50%. The
government also had to take over a number of financial institutions, and kept some of
them under public administration until 1999. The total cost of the various support
programmes for banks and debtors that have been implemented has been estimated at
around 20% of GDP, which is lower than the cost of Argentina’s crisis, but similar to that of
the Japan’s crisis. This crisis revealed the need for stronger market supervision. The
balance of payments returned to equilibrium soon after the crisis, but the financial system
remained fragile for several years, with some banks under state administration until 1999.
The setting up of CNBV as a response to the prudential challenge and systemic risk
The CNBV, the financial regulator was established as an answer to the crisis in 1995,
merging the previously separated banking and securities commissions, strengthening the
regulatory framework and fostering consolidated supervision, with more stringent
requirements for the capital of banks. The law on the protection of savings for bank
accounts passed in January 1999 established a new institute, IPAB (Instituto para la Proteccion
al Ahorro Bancario). Its original role was to manage the deposit insurance scheme but its
mandate was broadened to include the administration of the various financial
programmes and the related assets and liabilities. The entry of NAFTA into force in 1994
removed barriers to entry for foreign ownership for financial institutions established in
Canada and the US (this also applied to the NAFTA subsidiaries of non-NAFTA parent
companies). However, strict limits on market shares were maintained by institution and for
foreign investment in aggregate. Most important was the prohibition of controlling foreign
stakes in banks whose capital exceeded 6% of the total net capital of the banking system
(applying in practice to the three largest Mexican banks). The remaining restrictions on
foreign ownership were eased in 1999. As a result, the three largest commercial banks have
now been de facto transferred under foreign control. In 2001, more than three quarters of
assets belonged to foreign controlled banks, while foreign banks also had a remaining
minority stake in 7.5% of additional assets. The full take over of Bancomer by BBVA
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early 2004 adds to this process. The strengthening of the supervision and regulatory
framework also involved bringing Mexican rules closer to international norms. New capital
adequacy requirements were gradually phased in. The powers of the CNBV were also
reinforced in terms of prosecution and prudential regulations.
The current framework for regulation and supervision of the financial sector involves
a number of majors actors: Banco de Mexico, the Ministry of Finance, (Secretaría de Hacienda
y Crédito Público de México, SHCP) both directly and through a number of agencies linked to
it: the CNBV, the insurance commission, CNSF, Comision Nacional de Seguros y Fianzas), the
Retirement Fund Commission (CONSAR, Comision Nacional del Sistema de Ahorro para el
Retiro). Other agencies not related to SHCP are also involved: the IPAB mentioned above,
and a body to protect and advise users of financial services (CONDUSEF – Comision Nacional
par la Proteccion y Defensa de los Usuarios de Servicios Financieros).
Since the crisis, the banking sector has largely recovered.16 The banking system is
increasingly solid and as profitable as its OECD counterparts. The injection of foreign
capital in the domestic banking system has also facilitated technology transfers and
conforming prudential practices with international standards. The rate of profit which was
negative in 1996, is near 1% after tax, which is above OECD European countries and similar
to Canada. Provisions exceed non performing loans, and the net capital represented
roughly 15% of risk-weighted assets in 2001.
High margins and a limited recovery in credit to the private sector
The use of commercial credit remains very limited, representing only 10% of GDP
in 2004. The branch density is the lowest across OECD countries. While this may reflect the
low demand for credit in a context of depressed activity, at least until the later part of 2003,
other factors have been identified. First, the cost of credits remained high, largely reflecting
high interest rates at least until mid 2001. Also, net financial margins in the Mexican
system are generally much higher than in other OECD countries (Barth Caprio Levine,
2001). Second, banks have been reluctant to lend to riskier firms, including small and
medium size enterprises. Until recently, the assessment of risks for creditors, and the
possibility to exert guarantees were made difficult by an inadequate regulatory framework,
which in turn implies a stricter selection of lenders and higher lending rates. Some steps
were taken starting in 2000, with a new legal framework for bankruptcy and credit
guarantees, shortening and simplifying the process of bank foreclosure and increasing the
legal certainty of lending operations. But the new framework proved ineffective in
increasing bank lending. In April 2003, and Congress approved a reform of the legal
framework for secured credit transactions. Furthermore, the expansion of credit to the
private sector has been crowded out by strong demand from the public sector. The public
sector debt, even if not very high in comparison with other OECD countries, is very large
relative to the stock of private financial assets, and until the recent decline in interest rates,
government bonds were offering very attractive remuneration.
The banking system incurs high operating expenses, above 5% of the average balance
sheet,17 against 3% in Canada, the US or Europe, and relatively high levels of provisions
against losses. These are exerting downward pressure on the profitability, in spite of high
commission fees and high financial margins. Some observers mention dissipated rents,
and insufficient competitive conditions (see Negrin and Doherty, 2003) for credit cards (see
also Garcia Alba, 2004 for a general perspective). For example, Garcia Rocha (2004) states
that “the low level of financial penetration is one of the most unfavourable consequences
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of the lack of competition in the sector”. The consolidation in the banking system implies
that the three largest banks represent two thirds of the market share, and the 6 largest
banks over 85%. The priority given to consolidation in recent years has restored healthy
fundamentals of the banking system. Less attention has been paid to fostering efficient
and competitive market conditions. The high level of concentration of the commercial
bank sector following the consolidation makes non-bank banks even more necessary to
preserve competitive conditions in the financial system. The avoidance of excessive risks
in the system has not been matched by a similar concern to foster competition, either in
the search for deposits, or in reducing the costs of credits. This has spillover effects on the
industry (Garcia Rocha 2004), as it accentuates the industrial concentration, and banks
share rents with enterprises enjoying market power.
Additional sources of finance play a significant role
A number of additional specialised state-owned development banks, representing one
fifth of the financial system assets play an important role in the rural sector, for foreign
trade, and for SMEs. Measures undertaken in the early 2002 to rationalise the sector are
welcome. Recent years have also seen a rapid development of other financial
intermediaries (the so-called non-bank banks), which fill the gaps left by the banking
system in a context where the priority was consolidation for the commercial
banking system. These other financial intermediaries increase competition in financial
intermediation to some extent, often filling market niches left over by the large
commercial banks. As credit to the private sector by commercial banks has shrunk from
over 40% of GDP in 1994 to under 20% in 2001-02, other credit institutions, non bank banks,
SOFOLES, credit unions, are playing a crucial role, as they represent an equal share of
financing in recent years (around 20% of GDP).
This is the case of the limited purpose financial companies (Sociedades Financieras de
Objeto Limitado, SOFOLES), which are specialised institutions that do not take deposit and
are concentrated on specific lending (mortgage, consumer credit) or a specific sector
(automobile, construction). When fully independent, they are subject to regulation by the
Ministry of Finance, specific stipulations from Banco de Mexico, and some supervision from
CNBV. The savings and loans sector and credit unions can receive deposits and generally
engage in consumer and commercial loans. Until recently some of these institutions, such
as the credit co-operatives, escaped effective supervision. Starting in 2001, measures have
been taken to develop a level playing field of regulations and supervision between different
types of intermediaries. Under the new legal framework created by the popular savings and
credit law (Ley del Ahorro y Credito Popular) of June 2001, savings and loan institutions and
credit unions have to change their status and be transformed into Popular Financial Societies.
These are put under the supervision of confederations and federations working together
with the CNBV. The newly established BANSEFI (Banco del Ahorro Nacional y Servicios
Financieros) is playing a leading role in reorganizing this sector. In addition, a new
department in charge of supervision and surveillance of credit unions was created by the
CNBV and unhealthy institutions are being closed.
Institutional investors and capital markets
The capital markets are less developed than in other OECD countries, or even than in
some other non OECD middle income countries. This has been attributed in part to a legal
system, which offered less protection than other civil law systems of French origin, and
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also less than in other Latin American countries such as Chile.18 A recent development has
been increased issuance of corporate debt, albeit only open to a minority of major exportoriented companies. While this points in the right direction, a stronger capital market is
needed to allow financing of medium-size companies, and not only the large and exportoriented ones as has been typically the case in Mexico. Venture capital and equity
financing have been shown as having a significant impact on growth. However, these
sources of financing still play a negligible role in Mexico.
Among institutional investors, the most dynamic are pension funds, which have
expanded quickly after mid-1997, when social security reforms introduced a fully funded
capitalisation pension scheme for private sector employees. Pension fund administrators
(AFORES) are often the subsidiaries of a bank-led financial conglomerate. They are regulated by
a specific institution, CONSAR. However, because of strict investment guidelines prevailing
until recently, most of the assets of these funds are still invested in government-related assets,
with a crowding out of the private sector (Beristain Iturbide 2003). The easing of the regulatory
guidelines on investment by private pension funds represents a recent important step to allow
diversification of investments away from public sector debt. The former limit of 35% of funds
invested in the private sector has been now eliminated and replaced by limits set in terms of
credit rating of the issuers, and concentration limits have been tightened.
The water sector
Constitutional framework
The water sector is strongly embedded in legal regulations. The Constitution
(Article 27) defines water resources either as public ownership, including surface and
groundwater, and privately-owned water, either with a public utility or not. Public water is
neither alienable nor subject to ownership by prescription, whereas private persons may
appropriate privately-owned water. Following rulings of the Supreme Court in the 1920s,
water considered as a national water resource needs to have all of the characteristics listed
in the fifth paragraph of Article 27 of the Constitution. Most of this “public water” receives
“undefined property rights” (Ugarte 1991). The constitution stipulates the permissive use
of national assets in Article 28, giving the State the possibility to grant concessions of
exploitation, use or profit from the Nation’s assets, in a way which avoids “monopolisation
contrary to the public interest” (Cossio Diaz 1995). Finally, the Constitution also stipulates
in Article 115-III, which was introduced in 1988, that each municipality must organise its
own water supply services. Municipalities can either manage these services directly or
contract them out to a service provider, which will operate autonomously but under their
supervision. The Constitution already introduces a three-level responsibility for water
management, with the Federal, State and Municipal levels involved. In this framework,
water also plays a key national political goal and is part of the essential Presidential
commitments on the policy agenda.
Context
In Mexico, availability of water is inversely related to the demand for it. Population
growth has been greater in the semi arid and arid north, northwest and central regions
where water shortages occur. These regions account for three quarters of the population
and over 80% of GDP, but dispose of only 28% of the water resources. 15% of the aquifers are
overexploited, but represent 50% of the country’s groundwater supply (Kemper Alvarado, in
Giugale Lafourcade 2001). In the dry regions, the availability reaches approximately
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2 000 m3/inh./year, a rate considered dangerously low by international agencies such as
the World Bank or the UN. Slightly less than a third of the cropland is irrigated, placing
Mexico among the world’s largest irrigation countries. As a result, 80% of water
withdrawals are for agricultural use, including livestock, which represented only 5.4% of
GDP in 2002. This structure of water use differs from other OECD Countries, even those
with a significant agricultural production, such as France (12%) or the Netherlands (32%),
the United States 40%, Italy (46%), Spain (66%). However, the percentage is 75% in
Australia.19 Conversely, use by industry remains very limited. The use of water for
agriculture is largely subsidised (see more details below), a problem compounded by an
agriculture electricity subsidy, (Tarifa 09), which in the past has reached up to 85% of the
cost (Ugarte, 1991). Cheaper electricity provides disincentive to save water. On the other
hand, extraction charges (mainly industry fees) represented two thirds of CNA revenue
in 2000 (OECD, 2003). The problem is compounded by a direct fuel subsidy to the agriculture
sector, which significantly reduces the costs of water pump operations (Ley de Energia para
el Campo).
In spite of a lack of water, consumption in Mexico is relatively high, at around 800 m3
per capita, only slightly lower than the OECD average, and higher than the European
average, similar to Japan (FAO, 2003).
Historical aspects
The priority given to irrigation is embedded in a historical context. Following
the revolution which had severely affected the irrigation systems, President Calles
implemented a policy of large scale financing of irrigation to foster economic development
and create middle class groups among farmers. The National Irrigation Commission (CNI)
created in 1926 launched a number of ambitious projects, on the assumption that self
financing was not possible. Up to 1960, the northern states, which are the driest, received
half of the irrigation investment (Ascher 1999).
The creation of an Irrigation Commission (CNI) was in relation to the redistribution of
land to the farmers, established by the Agrarian Law of 1915 (see OECD, 2003). The law
created the ejido system of collective land use, under which land was the property of the
nation, and ejidatarios, had the usufruct as a group. These groups were often underprivileged landless indigenous communities. President Cardenas promoted the primacy of
the ejido-based, redistributive agricultural policy. While ejidos controlled only 15% of arable
land within irrigation districts in 1930, by 1940, they controlled almost 60%. The National
Irrigation Commission, which was in theory in charge of setting prices for water, lost this
power. An “ability to pay” criteria was introduced as a replacement. The fact that the fees
would not be collected by the water administration also meant that the irrigation
authorities or their successors had little to gain by collecting greater fees, which would
have been politically unpopular among farmers.
The specific imposition of water charges was essentially left to local district managers
and political leaders. Under this system, larger scale farmers could not be denied access to
the same low water rates going to the others. This system introduced the under-pricing of
water for agriculture use, still entrenched in modern water management in Mexico. The
estimated percentage of operating costs covered by water use charges was always less
than 50% until the end of the 1950s. In the 1940s, 50s and 60s, irrigation construction
represented between 80 and 90% of total agricultural investment, falling to 60% in 1980s. The
Ministry of Water resources, which was the successor of the CNI, criticised the large drop in
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operating expenses covered by charges, as this led to a financial crisis, with a decline in
investment. This led to formulating the first comprehensive assessment with a 25 year water
resource plan. It became clear that the political reasons for establishing the system were
biased. Irrigated land was increasingly concentrated in the hands of large scale farmers. Big
export-oriented farmers gradually found ways to acquire a larger share of the benefits of
subsidised irrigation. The inability to increase charges and the resurgence of large farms
reflected institutional dynamics that were difficult to reverse with policy tools.
A large policy shift occurred in the early 1970s, with a reassessment of priorities by the
National Water Plan Commission, away from system expansion and towards maintenance
and more efficient water use. The lack of charges deprived the Ministry of Water of financial
support. The Ministry officials were able to reduce the subsidy in the 1960s, with an increase
in charges. However, while the level of the subsidy declined, the distribution of benefits was
increasingly concentrated, because of land consolidation and promotion of commercial
agriculture. This revealed the ambiguity of a policy shared between a desire to support the
ejidos and small farmers through support packages, and the ambition to promote exportoriented large scale agriculture, at a time when the oil resources and manufacturing exports
did not play the same role as today. However, with rising inflation in the 1970s, water charges
declined against expenses in real terms. During the oil boom, President Lopez Portillo
decided to increase subsidies for agriculture, including water cost subsidies. The reduction of
charges ultimately led to severe damage to physical structures and a chronic lack of
investment. In the early 1980s, the secretariat of water resources was combined with the
Ministry of Agriculture, into a “construction-oriented agency”. At the same time, resource
fees were established for extracting water, but agriculture and the provision of drinking
water to small rural communities remained exempt of the fees. The table below shows the
share of the operation and maintenance costs covered by water user charges since the
mid 1930s. However, these costs represent only a part of the total costs, which also include
the water costs, the infrastructure costs and the cost of treatment for residential use. The
water and infrastructure costs are not covered by the agriculture sector and the billing for
water costs and for the treatment for residential users remains minimal. The costs of
treatment are only covered by the industry.
This historical trend has also revealed a tendency to foster “major irrigation” (dams and
canals) rather than minor irrigation (wells, tanks ponds), which reduces water losses. Because
the major projects require government involvement, the intervention is politically visible,
giving more political credit for rents given to farmers, and also offering visible employment
possibilities and lucrative opportunities for contractors. This strategy could be quite vulnerable
in times of economic crisis, such as in the early 1980s, when the lack of funds reduced
maintenance and the irrigation infrastructure was neglected (Kemper Alvarado, 2001, op. cit.).
Table 4.1. Operating costs covered by water user charges
Per cent
1936-43
1
43
1.
2.
3.
4.
5.
Until mid 50s
45
2
1956-59
30
2
1960-653
End of 1960s3
1972-733
1980s4
Late 1990s5
Rising to 65
70
45
15-25
70-80
Tamayo 1946, quoted in Ascher 1999.
Orive Alba, 1960.
Schramm Gonzales, 1977.
Cummings and Nercissiantz, 1992; Gorriz, 1995.
OECD 2003.
Source: OECD.
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A first step towards increasing charges had been initiated in 1976 with some financial
decentralisation, and starting in 1980, an increase in the transfer of water management
systems for potable water and drainage systems to state and county boards. As a result,
some participation from users was introduced for industrial water, and potable water,
mainly for urban users.
A new strategy was implemented at the end of the 1980s as part of an irrigation
modernisation programme. The idea was to transfer irrigation districts to user groups, who
gained a degree of control in exchange for taking on more responsibility for financing
water costs. However, the scope of this strategy remains limited, in order for the CNA to
keep responsibility for large scale projects. In addition, certain users have been unwilling
to take on the projects in order to avoid the problems related to the costs of operations,
infrastructure and maintenance. As a result, the federal government still continues to
absorb a significant proportion of these costs. In 1992, the land redistribution was declared
ended, and ejidos were awarded increased rights to their land. The 1992 law authorised
ejidatarios to sell their land, while also registering it. The 1995 recession affected the water
sector. The investment for supply, sewerage and sewage treatment decreased, only
representing a fifth in 2001 of the 1991 level (CNA, OECD, 2003).
The setting up of the CNA
The CNA was set up in 1989 when the irrigation authority was separated from the
agriculture Ministry. As a result, “the intragovernmental pressure for irrigation funds
would come from an agency without responsibility for determining the optimal weight of
irrigation investment within the overall portfolio of agricultural investment” (Ascher, 1999).
The CNA was attached to the Environment Ministry and was conceived purely in terms of
deconcentrated management without a clear reassessment of the tasks and missions
which were previously the remit of the irrigation agency. The 1992 Law on national waters
mandates the Federal government to formulate and implement the water programme. The
Federal Law of the Rights (Ley Federal de Derechos) still continues the previous policy of
exempting agriculture users of water, and also drinking water in rural communities, to pay
a basic fee for the water as such.
The local dimension
Water differs also from the other four sectors of the study because of its local
implications. Three levels of regulatory authorities are involved, with the Federal, the State
and the Municipal level. The CNA has representation and staffing in each of the 31 States.
The potential problems generated by this overlapping of federal, state and municipal
responsibilities have been the first OECD Environmental Reviews (OECD, 1998b). In addition
to CNA’s role, a joint intergovernmental body of the United States and Mexico IBWC/CILA
(International Boundary and Water Commission), created in 1944, manages in coordination
with CNA the allocation of international waters to some parts of Northern Mexico.20 The
IBWC distributes water between the United States and Mexico, and the CNA administers
the Mexican portion of it. The impact of decentralisation can be analysed at three levels:
The federal perspective
The setting up of the CNA itself was part of a modernising policy, one goal of which
was to decentralise water management. Progress has been made towards decentralisation,
but remains incomplete. In 2001, 27 River Basin Councils (RBC) were in operation, with
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6 Basin Commissions, 4 Basin Committees and 47 Technical committees for Subterranean
waters (COTAS), with also Aquifer Committees (AC). The management and financial
responsibility for operating and maintaining the irrigation systems has been transferred to
users’ associations. This is part of a policy which enables users, but also transfers them the
responsibility of maintenance costs. However, the transition remains incomplete and
where water is still managed by the CNA, users still do not cover total maintenance costs.
The decentralisation promoted by CNA follows the geographical distribution of water
resources, with basins which cover several states. This introduces a discrepancy between
the decentralisation policy promoted at federal level and the conflicting ambitions of the
states. Progress remains incomplete, as capacity building is still insufficient at local level.
RBCs and ACs have not been granted any legal authority. They are merely catchment-based
co-ordinating forums that bring together water users and government organisations. They
have also been created with limited resources, and were not provided sufficient technical
and financial assistance. The transfer of administration would require a clearer set of
federal rules, for example, with respect to the volumes of water to be distributed and
consumed. River Basin Councils face difficulties in reaching agreement over extraction
rules, because of the various interests involved. Some authority would be needed in order
to reach agreements when the interests are clearly in conflict.
The municipal and state perspective
Many local water utility companies (Organismos Operadores, OOs) were created at the
beginning of the 1980s following the decentralisation of responsibility for management
systems of drinking water and drainage systems. However, the reforms are incomplete, as
most OOs in Mexico operate as municipal or state entities, and not as commercial
companies. Their role is that of day to day management, without involvement in investment
and long-term planning, as their accounts do not include asset depreciations. The costs of
water extraction and pollution underestimate the true operating costs. The nomination of
heads of boards follows the municipal electoral cycle (three-year). As a result, the CNA
estimated the average length of service of managers at 1.5 years. In the absence of a strong
financial framework, the sector relies largely on federal transfers that involve complex
operations, which provides weak incentives for accountability and for establishing user fees.
So incentives to pay for the “true cost” of water remain weak. The OECD (1998) review stated
that “the lack of money resulted in poorly managed municipal departments providing poor
service…”. The infrastructure has suffered dilapidation through lack of maintenance and as
much as 40% of the water is lost through leakage. Only two thirds of the water used by
customers was actually billed, and only four fifth of that was actually paid. The water
actually paid represented only 32% of the water supplied. In the 1990s, surveys on municipal
management by CIDE stated financial reasons as the most important problem for water and
sewerage (OECD 1998b). While the decentralisation of responsibilities is generally positive, it
requires a strong framework, and professional capacity at the local level, to be fully effective.
Private sector participation has been encouraged to attract investments, mainly
concentrated in the area of wastewater treatment with some cases within the distribution
sector. The satisfaction of users with private water distribution is low, as illustrated by the
case of Aguascalientes, where public protests followed the doubling of prices, resulting in
the cancellation of the contract by the municipality. Waste projects involving the private
sector have also often encountered difficulties as is illustrated by the fact that only a third
of the contracts signed were operational in 2001, due to a weak regulatory framework.
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States can be involved via the supervision of water distribution operators. This is
illustrated by the situation of the Lake Chapala, the largest natural lake in Mexico, with the
most densely populated river basin in Mexico: Lerma-Chapala-Santiago-Pacifico Basin. This
region exemplifies the difficulties of Mexican water management, with inefficient agriculture
use and inefficient urban water supply. In this region, the States and the CNA have competed
for some planning and strategic decisions. The first Mexican River Basin Council was
established in 1989 with formal enactment of the coordination by the federal executive in 1991.
This followed early attempts at regional planning, and the establishment of the LermaChapala-Santiago Commission in the 1950s, followed in 1993 by the first master plan for the
catchment area. The five states in the region are competing with the national authority for
political power within the River Basin Council. States are competing for their catchment area
as their representatives in the council generally attempt to maximise their own water supplies
rather than to consider the preservation of the region’s aquifers as a whole (Maganda, 2003).
One of these States, Guanajato took the lead in terms of requesting autonomous
responsibility for this sector. This state has a very low availability per capita, as annual cubic
meters per person have fallen from 1 500 in 1970 to 750 in 2000. The state has experienced
intensive development both in agriculture (85% of water consumption) and industry, as the
LPCS basin accounts for 70% of the nation’s industry. After a first prospective multi-sector
study was initiated, the need for more state attention to water matters led to the first setting
up of a State Water Commission (CEAG) in 1991, as a decentralised public entity for the
provision of drinking water, sewage removal and sanitation. In 1995 the new elected
governor, wanting a broader focus of the commission, promoted an integral vision of water
management with strategic planning and information gathering. The budget of the agency
was increased 10 fold between 1995 and 2000. The CEAG also oversees different operators,
which coordinate drinkable Water and the Drainage Program in Urban Areas. Nevertheless,
environmental protection for residual water discharge remains under another state
authority. The state was also the first to pass a law on water in May 2000. These innovative
actions generated conflict with the CNA, which considered that it was in charge of planning.
Following this pioneering example, 27 States have passed their water laws, and 13 have set
up water commissions. The revision to the law on National Waters approved in May 2003
strengthens the decentralisation of water management. However, the difficulty with this
process is that the natural geographical boundaries for water management do not match
that of the institutional boundaries of the states.
Mexico City, with the Federal District, is also located in a dry basin, partly dependent
upon the LPCS Basin, with water having to be brought from as far as 200 km away, which
illustrates the problems faced with urban access to water (NAS 1995). While the core areas
of the Federal district are well served on average, deprived groups face severe access
constraints in some areas.
Current challenges
Rapid demographic growth and industrial development have increased the overall need
for water. At the same time, the relative availability of water has diminished over the past
20 years. If Mexico made substantial progress towards the targets set in the 1995-2000 plan
to improve supply, sanitation and waste water management, the current pathway for the use
of water resources was clearly identified as unsustainable by the latest OECD Environmental
Review (2003). The current level of investment stands at half of that required to achieve a
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4. REGULATORY AGENCIES IN MEXICO: THE CASE OF ENERGY, WATER, FINANCIAL SERVICES AND TELECOMMUNICATIONS
sustainable future. Water losses, mainly from irrigation and drinking supply systems remain
high and the over-exploitation of ground water resources continues.
The regulatory and economic framework has hitherto provided little incentive for efficient
water use and conservation. The implicit priority remains for low priced water for relatively
low value agricultural production. The water programme for 2001-06 sets a number of
ambitious targets. However, it reflects the current regulatory system, which it does not aim to
change fundamentally. The CNA is the major player in this sector, and its governance structure
and strategic orientations will be analysed in more detail later in this chapter.
The telecommunications sector
A privatisation process early on
Unlike the other chapters of the study, the telecommunications sector has already been
analysed as part of the previous Regulatory Reform Review (OECD, 1999). The situation of the
sector today has improved since the regulatory reform started in 1990, when fixed line
density was 6.4 per 100 inhabitants. However, significant challenges remain to be addressed
considering the remaining low penetration rate of telecommunication services. An
important element was the privatisation of the incumbent, Telefonos de Mexico (“Telmex”)
in 1990. The Mexican State owned 48% of the shares until 1972, when the company was
nationalised, albeit not fully. Telmex shares remained quoted throughout the period. Whilst
poor performance might have been one of the reasons for privatisation, the performance of
the previously publicly-owned company was in fact not especially bad, when compared with
other Latin American countries, such as Chile (Ramamurti 1996). However, it deteriorated at
the end of the 1980s. The privatisation occurred before the modernisation of the regulatory
framework and the establishment of the regulator, COFETEL in 1996. At the time of its
privatisation, Telmex was granted an amended concession title. This included conditions for
specific coverage obligations, tariff controls, quality of service and information supply.
Article 28 of the constitution was also modified. This specific sequencing of reforms is the
key of the recent history.
Telmex was privatised in December 1990,21 and the Ministry (Secretaria de Communicaciones
y Transportes – SCT) amended Telmex’s concession title. The amended concession allowed
Telmex to function as a complete monopoly in long distance services, subject to regulation by
the SCT Ministry from 1990-96. In other countries, the long distance services were generally
the first to be open up to competition. The monopoly period was designed to allow Telmex to
achieve network expansion targets. Just before privatisation, Telmex was allowed to
substantially increase its rates, and the revenue per line increased by 47% in dollar terms
between 1989 and 1990. Except for the monthly rent in residential services, prices expressed in
US dollars were significantly higher in 1991 than for comparable operators in the United States,
such as Southwestern or Pacific Bell (Ramamurti, 1996). The number of lines increased rapidly
from 1990 to 1994, but the growth rate fell abruptly in 1995 and 1996, due to the country’s
economic crisis. The previous telephone tax, which ranged from 22 to 70%, was replaced by
a 29% deductible telephone tax on Telmex, which the company could avoid if its profits were
reinvested. In 1990, this implied a transfer of 643 million US$. Between 2001 and 1997, the
number of lines increased by 50%. The percentage of digital access increased from 29% in 1990
to 90% in 1996 and 100% as of 2000. In 1990, duopoly cellular concessions were granted for nine
regional markets, with Telmex operating through its cellular subsidiary Telcel, in a way
analogous to the US at that time. Since September 2000, Telmex has spun off its Mexican
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Wireless operator, Telcel, as part of America Movil, a new Mexican corporation, while
remaining under the control of Telmex’s main shareholder.
The definition of a regulatory framework opening competition in a second phase
The 1990 privatisation was accompanied by a new regulatory framework (Reglamento
de Telecomunicaciones), which defined SCT’s responsibilities with supervising the
concession. Full modernisation of the regulatory framework only occurred in 1995-96,
when the Federal Telecommunications Law (FTL) was enacted, followed by a new Decree
which reformed the 1990 SCT Reglamento Interior. However, it is revealing that the COFETEL
is mentioned in a transitory article of the law. The COFETEL is set up by a decree from
9 August 1996 as an agency with technical and operative autonomy. An additional
Reglamento Interno, issued by the board of the commission, sets out the internal rules. The
establishment of COFETEL by way of the above mentioned three legal instruments, defined
its operation in an inefficient division of powers and processes between the line ministry
and the regulator, which a current proposal intends to address (see Box 4.5).
This new regulatory framework opened the way to competition. Concessions to new
entrants were granted in 1995-96. However, conflicts about interconnection charges arose
that had to be resolved by the SCT itself. The regulatory framework that had been put in
place presented many deficiencies. COFETEL had not been granted enough flexibility and
any decision-making authority to take timely actions on issues creating significant
conflicts among industry players.
Following the market opening, Telmex still controls 75% of the long distance market
and 95% of fixed lines. Telcel, which is indirectly controlled by the same shareholder,
holds 79% of the mobile market. Since competition has been introduced, local, mobile,
long distance and international rates have fallen, but still need to decrease further. Telmex
has rebalanced its tariff, and revenues from local service increased from 40% to 60%
between 1996 and 1998, while long distance revenues fell from 57% to 34%.
The regulatory framework stipulated that Telmex had to be designated as a dominant
player by the competition authority (Comision Federal de Competencia – CFC) for COFETEL to
be able to implement ex ante asymmetric regulation of an operator with market power.
Telmex is subject to regulation as established in its concession title (e.g. price cap, tariff
approval, coverage obligations, quality of service). The CFC confirmed a resolution in 1998
deciding that Telmex had substantial market power. As a result COFETEL issued specific
regulations on Telmex in 2000. However, the decision of the CFC was subject to several
amparos (OECD 2004) by Telmex, resulting in the suspension of the CFC’s decision and of
the COFETEL regulations. The regulations issued by COFETEL in 2000 were likewise
suspended. Some experts share the view that the Mexican antitrust law, phrased in a way
as to combat monopolistic practices was maybe not fully suited to the case, as Telmex was
technically not a monopoly, but had substantial market power. The CFC later on withdrew
its 1998 resolution. The specific regulations issued by COFETEL were revoked in May 2002
in compliance with judicial order. The CFC issued a new market power determination to
take into account the comments of the reviewing court. However, the new resolution was
challenged in court again by Telmex and on May 2004, Telmex won this amparo. The
situation remains blocked as a result. This process lasted over a 6 year period, during
which mobile phone markets changed considerably in most OECD countries. The issue of
the settlement rates between Mexico and the US generated a trade dispute, which was
eventually brought to the WTO and was resolved in 2004 (see Chapter 3 for more detail).
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The opening to competition of the local service has been slower than in the long
distance market. Following the establishment of local service rules in 1997, COFETEL
auctioned a large part of the spectrum available for the provision of PCS and wireless local
loop services. A number of new operators are now operating in the local phone market.
However, their share in the international long distance calls and overall may be
underestimated by some statistical bias.
A modernised network, but with lower access rates and higher relative prices
than in OECD countries
If competition developed somewhat after 1996, in the long distance markets, the
overall recent trends show that in spite of recent improvement, Mexico still lags behind in
several significant dimensions of market development. Regarding teledensity, Mexico has
fewer fixed telephone lines per hundred inhabitants than most comparable countries in
the region. Brazil has more lines than Mexico. Some recent OECD data shows that although
there has been some catch up in performance, this remains limited (Figures 4.2 and 4.3). If
the number of lines increased by a 3.1 factor between 1990 and 2003, this performance
remains modest when compared to other OECD countries.
Prices remain relatively high: for example, the business telephone charges, expressed in
purchasing power parity terms, were the fourth highest across OECD countries in
February 2004 (Figure 4.4). These charges have been reduced in relative terms since 2002,
when they were the highest across OECD countries (OECD Communications’ Outlook 2003).
Between 1999 and 2003, there was a reduction of 9% for the monthly subscription for
residential services, and a reduction of 38% in long distance service within Mexico. However,
these prices still need to be reduced further.22 The new International Long Distance Rules,
currently being finalised, are likely to help in further reducing long distance tariffs.23
In terms of quality, the answer seizure ratio, which is a measure for of successful
completion of the international traffic, was the second lowest across OECD countries
in 2001, just above Turkey. The proportion of faults repaired within 24 hours also remained
significantly lower than the best performing OECD countries in 2001.
Figure 4.2. Mexico’s density of fixed lines
As a percentage of the OECD average
Mexico/OECD
Turkey/OECD
Portugal/OECD
100
90
80
70
60
50
40
30
20
10
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Source: OECD.
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Figure 4.3. Mexico’s density of mobile lines
As a percentage of the OECD average
Mexico/OECD average mobile
Turkey/OECD average mobile
Portugal/OECD average mobile
120
100
80
60
40
20
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Source: OECD.
Figure 4.4. Business telephone charges, OECD composite basket
As a percentage of the OECD average expressed in USD PPP
2002
2004
In percentage of the OECD average
250
200
150
100
50
Sl
ov
ak
Re
pu
b
Tu lic
rk
Po ey
la
M nd
ex
Cz H ico
ec un
h ga
Re ry
pu
Po blic
rt
A ug
Ne ust al
Un w ral
ite Zea ia
d
Ki land
ng
do
m
Ko
re
Au a
st
ria
Ge Ita
er ly
m
an
Ja y
p
Be an
lg
iu
Fr m
an
Gr ce
ee
Un S ce
ite pa
d in
St
at
Fin es
lan
Ire d
lan
d
C
Ne an
th ad
er a
Sw lan
d
i
Lu tzer s
xe lan
m d
bo
Sw urg
e
De den
nm
No ark
rw
Ic ay
ela
nd
0
OECD Composite basket of business telephone charges, with Purchasing Power Parity Adjustment.
Note: Calls to mobile networks and international calls are included, VAT excluded.
Source: OECD.
Most analysts attribute some of the current deficiencies to the regulatory framework
established in 1995-96 (see World Bank’s analysis in Giughale and Lafourcade 2001). The
OECD 1999 report identified a number of shortcomings in the regulatory framework (see
Annex C). The COFETEL has faced a number of institutional difficulties, including the need
for increasing transparency in decision-making. Universal service obligations existed for
the transition period in the incumbent’s concession title. Mexico still faces an important
challenge to reach lower income areas.
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4. REGULATORY AGENCIES IN MEXICO: THE CASE OF ENERGY, WATER, FINANCIAL SERVICES AND TELECOMMUNICATIONS
The energy sector
Constitutional aspects and the scope of energy in this report
The energy sector will be discussed in this report only as it relates to the
responsibilities of the Comision Reguladora de Energia (CRE). In fact, this is narrower than the
full scope of the energy sector, which includes:
●
Oil, crude oil extraction and refinery.
●
Gas, natural gas extraction, transport and distribution, LPG.
●
Electricity, production, transmission and distribution.
This report will not cover any “upstream” issues related to either oil, or natural gas
extraction, which does not fall within the remit of the CRE. In addition, these aspects are
safeguarded by very strong constitutional provisions and involve core aspects of economic
and social policy that would pervade all aspects of policy making in Mexico. The public
monopoly for these activities, PEMEX, also contributes significantly to the Federal Budget.
Most of the energy sector is governed by strong constitutional and legal requirements.
Article 27 of the Constitution defines and establishes the regulatory structure for the oil
industry and also for all aspects of the electricity sector (generation, transportation,
transformation, distribution and supply). Other aspects of the energy sector are related to
Article 25, which defines strategic sectors as the exclusive remit of the public sector, and
Article 28, which includes electricity and other aspects related to oil, such as petrochemicals.
As monopolies are forbidden under the Mexican constitution, Article 28 was needed to
permit public monopolies. The CRE was first created in 1993 by decree as an advisory body
for the electricity sector, and then reformed with the 1995 Energy Regulatory Commission
act, as an autonomous agency for electricity and natural gas.
Electricity
The significant economic growth experienced by Mexico resulted in a growth rate of 5%
a year in electricity demand over the past decade. The pricing structure is unbalanced with
domestic users covering less than 50% of costs, and agricultural users covering 31% of costs.
This implicit subsidy paid by industry and services puts Mexican producers again at a
disadvantage in relation to their North American counterparts. 5% of the population does
not have access to electricity. Problems with the service also result in power cuts.
The supply to final consumers is ensured by two publicly-owned companies, CFE for
most of the country, and LFC, which is in charge of the Federal District, the Metropolitan area
of Mexico City. Both public companies face significant challenges in meeting future demand
but their current financial situation does not allow significant investments. The total of their
debt and borrowing is directly linked to the overall limits on government wide borrowing.
The electricity sector underwent its most significant reform in 1992, with the
modification of the Public Electricity Service Act, which had originally been enacted in 1975.
This modification opened up the private sector participation in generation activities,
including self-supply, cogeneration, independent power producers (IPPs), imports and
exports and small-scale generation. Private participation schemes, such as the IPPs, have
been able to meet the increasing electricity demand. However, they are relatively high cost
and are not sustainable as a long term solution, as they involve long-term contracts with
public companies. These correspond to an implicit future commitment for public finances:
IPP projects enjoy explicit public guarantees, as both CFE and LFC are public entities.
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Natural gas
The natural gas sector is the one where liberalisation has been most advanced partly
through the introduction of gas-generated electricity from private providers. The 1995
amendment to the Ley Reglamentaria of Article 27, initiated under the Zedillo Administration,
offered the private sector the possibility to build, operate and own natural gas transportation,
storage and distribution systems, including marketing and foreign trade. However, exploration
and production, processing and first hand sales were still considered as strategic activities
reserved for PEMEX. 24 A permit from CRE is needed for transportation, storage and
distribution. The 1995 gas reform should be seen as a complement upstream to the 1992
electricity reform, as it aimed at securing a cost-effective and environmentally friendly fuel for
power generation. Gas consumption for energy generation accounted for 14% of natural gas
demand over the 1990s and is expected to reach up to 30 or 50% of total gas demand.
The rapid increase in demand coupled with only modest investment has resulted in a
surge in imports from the United States. This was partly intended as a way to promote
competitive pressure on this market. As of August 1999, gas was exempted from import
duties. This is important as the Mexican market is strategically linked to the North
American market. The prices of first-hand sales are regulated by CRE using as an
international reference the Southern US market to which Mexico is connected. This is also
a way to take into account the opportunity cost of Mexican Gas. High imports appear
paradoxical in a country with ample gas reserves, but reflect the constraints on PEMEX. The
company is subject to a significant tax burden. As a result, many activities are not
attractive, which would otherwise be profitable. The gas produced domestically is
associated gas. A shortfall in associated gas can be compensated by more costly upstream
and downstream investments in non-associated gas, such as LPG.
Current challenges
In this context, the main challenge facing the sector is the need to ensure market
dynamics, to attract new participants and ensure competition at prices reflecting costs.
Public intervention has been most successful in the gas sector, with the CRE putting in
place a credible market framework, following the 1995 reform, which extended its power to
the gas sector. This success was possible in spite of some limitations, given the role of
PEMEX in this sector. Part of the challenge for the CRE will depend on the result of reforms
in the electricity sector. The agency enjoys a clear and relatively wide remit for gas, but its
role is much more limited in the case of electricity. CRE mainly regulates private generation
of electricity and the way in which it is sold to the public sector. However, there is no formal
third party access to the grid, no separate management of the grid, and choice of provider
offered to the final user. Consequently, the powers and role of the CRE have to be analysed
in the light of this limited framework. Further options related to the electricity sector will
be dealt with in greater detail by another chapter.
Assessment of policy implications
The four sectors of the study illustrate that some of the shortcomings of the current
regulatory framework have had a significant impact on key aspects of the Mexican
economy. The lack of investment in infrastructure, which has plagued several of these
sectors also reflects some of the regulatory challenges, since proper economic incentives
and an appropriate framework for investment and growth need to be established. The
Mexican agencies result from historical developments that often constrain policy-making
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in these sectors. Some arrangements may originate from the 1930s in some cases or from
the early 1990s in others. However, the opportunity cost of some of these regulatory
shortcomings is growing over time, as the Mexican economy needs to develop economic
opportunities for a growing population, securing access to essential services, such as
water, telecommunications or energy. Many of these issues have been identified in past
OECD reports (see Annex C). In each of these sectors, a core regulatory agency plays an
important role in determining how regulations are to be enforced. Past reviews have often
touched upon these issues in general terms, or have identified the need for strengthening
the broad regulatory framework without analysing the specific role of the agencies.
This chapter offers an additional perspective in systematically analysing
the governance arrangements for each of the four agencies, and setting them in an
international context. The next four sections of this report will therefore cover
independence, accountability, sectoral design, functions together with the powers of these
agencies and the contribution that a different institutional environment could make to the
future of these sectors, and the long-term economic perspectives of the Mexican economy.
INDEPENDENCE AND ACCOUNTABILITY OF REGULATORY AUTHORITIES
Independence is a relatively new concept in the Mexican administrative framework.
The Organismos Desconcentrados were primarily conceived to be technically and
administratively autonomous. The development of mechanisms to ensure democratic
accountability is also at an early stage. Building independence and accountability has to
take into account not only the legal framework but institutional habits but also the political
framework. As the costs linked with the lack of independence have recently become more
apparent, the possibility of ensuring accountability in a modernised institutional
framework appears more feasible. This section will discuss the institutional setting for
balancing independence and accountability, while providing some insights on how a
stronger framework for governance could be envisaged.
The Mexican system: the need of a proper framework for regulatory agencies
The legal framework
The heads of CNA, COFETEL and CNBV are nominated without a fixed term of
office (see Annex D, Independence and Financing of the Four Mexican Agencies). This is the
consequence of political accountability as these deconcentrated bodies are attached to the
Ministers. The COFETEL, CNBV and CRE are managed by a board that ensures a collegial
approach to independence. The CNA has one director general, directly nominated by the
President. The CNA also has a board, including a number of relevant ministers,
representatives from the states and on expert. The functions of this board have been
recently strengthened by a modification of the national water law on 29 April 2004,
including an oversight function in relation to the river basin councils, and the approbation
of general guidelines. The President of the Republic generally appoints the heads of the
agencies, except for the financial regulator, who is nominated by the Minister of Finance.
The Energy Regulator, (CRE) has fixed renewable terms, while the board of the COFETEL has
no fixed terms for the moment. (This is to be modified, see Box 4.5).
This lack of a consistent and homogeneous approach reflects a framework partly derived
from the principles of the 1976 Organic law. However, three of the agencies are created by a
specific law, which is not always fully in line with the 1976 Organic Law (see Campos et al. 2002
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for more detail). Other new agencies have benefited from a stronger framework. For example,
the Competition Authority (CFC) is headed by a board with members enjoying a 10 year
staggered term. The same applies to the IFAI, created recently to enforce the Transparency Law.
The terms are for six years and are not renewable, which ensures strong independence. This
shows that establishing independent agencies is feasible in the Mexican institutional context.
Additionally, the nomination of the chairman and board members of the IFAI must be
confirmed by the Senate, giving them further legitimacy in a presidential regime, and also
forcing a relatively consensual approach in selecting members. However, as the IFAI has just
been recently set up, only future experience will confirm whether this double approbation
system is the best institutional scheme in the Mexican context.
The initial experience
Mexico is currently undergoing a phase of significant political change. Some of the
regulatory agencies have been created in turmoil, or in response to a crisis, such as the
financial regulator (CNBV). In spite of these difficult circumstances, the CNBV has
established a certain credibility and authority. The specific nature of the financial sector,
and the close cooperation with the National Bank, one of the most independent in Latin
America, have partly preserved this agency from the impact of short term political
considerations. During a period of eight years, the COFETEL has already had four chairmen,
as a result of not having fixed terms. The CRE, where fixed terms apply, has only had two
chairmen since the law was enacted in 1995.
In this framework, CNA’s situation is relatively unique. It is one of the oldest agencies,
as it already has 12 years of experience under its current form. The agency is in fact much
older, as it has inherited the historical perspective from a very large agency identified with
the economic and social progress of the country from the start, particularly in the
agricultural sector. The CNA had only three chairmen since its creation and has in fact
enjoyed significant technical and actual autonomy. The size of the CNA, which is larger
than some ministries, preserves it de facto from some interventions. The economic
interests in water are also more local and diffuse than in the other sectors, where the
regulatees are either very large public or private companies. Strong support for the
agriculture sector in Congress also allows CNA to enjoy a certain budgetary stability, as
recently demonstrated through the Federal Bill of Expenditures (Presupuesto de Egresos de la
Federacion) and the National Water Law (Ley de Aguas Nacionales).
The features of the administrative appeal system also reflect a mixed framework (see
Annex I, Possibility of Appeals after Decisions Led or Instructed by Selected Mexican Regulatory
Agencies). In two cases, the appeal is made to the Minister, who is the hierarchical head of the
agency, as is the case for Telecommunications and financial regulation. This is consistent with
the 1976 Organic Law. However, appeals on CNA and CRE decisions go back to the agency in
first instance. This normally demonstrates to a slightly higher level of independence.
An international perspective
There is an international debate on the notion of independence. If regulatory agencies
are to run independently, requirements in the organisation of the relationship between
government and the economy are needed. Certainly, independent regulators can not
operate in a “vacuum”. They have to take into account the political and institutional
environment. However, they still need to be given solid technical independence in order to
achieve long-term goals.
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In the field of telecommunications (see Annex F), the COFETEL is much weaker than
most of its counterparts in OECD countries. Even though it has a board, any of its members
can be revoked “ad nutum”, and appeals can be brought directly to the Minister. This
contrasts with the United States and Canada, Mexico closest partners, where the term is
five years, and also with European countries such as Spain, the United Kingdom, France,
Germany or Italy. The possibility of having decisions overturned by the Minister exists only
in Hungary and Portugal. When appeals are made to political authorities in some other
countries, they are restricted to certain cases. For example, in Canada overturning
decisions on appeals can be considerably restricted if the decision is made by the governor
in Council. In some other countries, the decision can be overturned by a special board,
Monopolies and Mergers Commission in the UK or the Telecommunications Consumer
Board in Denmark. In addition, the number of 4 members of the board, an even number,
differs notably from the majority of OECD countries
In the field of electricity (see Annex G), the CRE has some common characteristics with
its counter parts in other countries. The board has five members, which is similar to the
FERC in the United States. The length of terms is also in line with the experience of the
United States and a number of European countries. The possibility of renewal exists as it
also does in the majority of countries, even if some have chosen to forbid it in order to
ensure a greater level of independence.
Three broad general models exist for financial regulators in OECD countries (see
Annex H). A first option is for them to be part of the Central Bank, which gives them the same
level of independence. This concerns a limited number of countries.25 A second option is to
have direct ministerial responsibility, as in Austria. However, the majority of countries,
including Mexico, have chosen to establish a separate agency. The level of independence of
this agency differs across countries. In Chile, Australia, the United States, and the United
Kingdom for example, the agency can independently grant or revoke licenses. In other
countries, this responsibility is either shared, or held by the Ministry of Finance.
In Mexico, the Ministry is responsible for granting the licenses, hearing the opinion of
the Central Bank and the CNBV. In addition, as the heads of the regulator can be dismissed
by the Ministry, and appeals decided by the Ministry, the effective independence of the
agency is limited and amounts more to operational independence. However, the overall
structure of the board of the CNBV favours coordination among its members, as it
facilitates a collegiate approach to the issues. Instead of having independent decisions
taken by an agency after advice from either the Central bank or the Ministry as in Hungary
for example, it involves de facto a tripartite arrangement in this sector. This may work well
when the players have a common understanding and practice of long-term goals, but could
also result in an unsatisfactory situation, particularly when the Central Bank holds a
different opinion.
Building a pathway towards trust and independence
In the Mexican context, the practice of ministerial oversight has generally
overshadowed the role of regulators, particularly in the most important cases. However,
Mexico is also undergoing a period of transition, and has only made some initial attempts
at setting up independent regulators. The deconcentrated bodies enjoy some technical
autonomy, reflecting a trend towards decentralised management. However, there was no
will in the past to let some strategic decisions be managed at arms’ length from the
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political environment. In this sense, Ministers are accountable for their decisions to the
President, who is elected, and to Congress, which can also influence the content of policy
contained in legislation. Transposing a regulatory model based on fully independent
regulators represents a challenging task in this context because it requires deeper changes
in several Laws, and possibly of the Constitution. The need to balance independence with
proper requirements for accountability requires progressively implementing a new set of
institutional relationships, fostering transparency and trust.
Trust in government is needed to improve the framework for independence and
transparency in decision making. In comparison with other Latin American countries,
Mexico has been credited for a relatively high level of dialogue with the private sector in
designing and implementing the key reforms of the 1980s-90s (Schneider, 1997). At the end
of the 1980s and in the early 1990s, a group of experts, facing minimal opposition from
parties and legislators, enacted a coherent reform package.26 The opening of formerly
monopolistic or publicly-owned activities, has generated strong market players in the
private sector, with often significant market power, while public monopolies still play an
important role in the energy sector. The transition has increased the role of Congress
which has led to a policy-making environment that is more complex and where the need
for a dialogue is intensified.
The need for investment to modernise the basic infrastructures of the economy
remains. Independence can be seen as a tool to help achieve some of these far reaching
goals, producing a growth enabling environment and fostering trust and transparency in
consultation with the private sector.
Balancing independence with accountability
Three aspects need to be considered for balancing the independence of a regulator
with its accountability: building appropriate governance structures; designing a proper
system of appeal, including defining which authority will hear appeals; and instituting a
dialogue between regulators and Congress and citizens in order to build institutional trust
in regulators. This needs to take into account the structure of the Mexican political system,
its current transition, and the growing role of Congress.
The Mexican regulatory framework faces the challenge of implementing stronger
requirements for independence to correct some of the current imbalances and to improve
the longer term prospect of overall market efficiency. Independence will only be ensured if
it is supported by the regulatory system itself, and if it is balanced by proper requirements
for accountability. The experiences of setting up the IFAI27 or the Competition authority
could be considered as good examples.
Independent regulators need to build a reputation for trustworthiness that makes them
accountable for their actions. This requires strengthening and modernising the system of
accountability requirements. Some decisions of a technical nature, such as defining safety
standards or authorising licensing on a technical basis, need to be made by an independent
authority. However, other major decisions, such as ensuring the overall balance in the
financial system, or setting up the framework for key essential resources such as energy or
water, may require either a dialogue or in some cases a direct involvement of the executive
at the political level.
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Governance structures
Governance structures of independent regulators play a significant role in helping them
to establish their credentials, as decision making bodies with enforcement functions. In
countries where these institutions were first established, as in the United States or Canada,
they have often been created as boards or commissions. A collegial approach allows for
internal discussions to be held before a decision is adopted. This is particularly pertinent
when conflicts of interest arise. This also reinforces the possibilities of ensuring due process
in decision-making, and may contribute to increasing the agency’s legitimacy and
independence. The collegial way of decision-making can also be seen in a large number of
European countries. In the United Kingdom however, some of the regulators have been
created with a single head. In Europe, the Nordic countries also often rely on a single head.
The composition and size of the board is equally important. For example, in the case of the
financial regulator, the agency has both a chairman and two vice presidents that the
chairman designates. It also has a full board where the Ministry of Finance and the Central
Bank have a seat each. This fosters collegiality in decision making among agencies in the
financial sector, but does not give the regulator the possibility of building its independence.
The organisation of appeals
The organisation of appeal procedures is a legal obligation, a democratic requirement
and a means of ensuring regulatory effectiveness. Various types of appeal procedures, exist
depending on the constitutional context. In many OECD countries, for example in the US
and in European, any person who contests an administrative decision has a “right of
appeal”. In Mexico, the jurisprudence/doctrine leads a very unique judicial review system
aimed at guaranteeing the rights of the population against any abuse of powers by the
public authorities at all levels, be it municipal, state, or federal (Box 4.3).
The current system for appeals and judicial review
This system has significant implications for the Mexican regulatory agencies. This is
particularly important as judicial decisions can hold up the execution of a decision by a
regulatory authority. Parties have first the right for a regular appeal, with two different tracks:
A) Administrative appeal (Recurso administrativo de revisión). Under the Article 83 of the
Federal Law on Administrative Procedure (Ley Federal de Procedimiento Administrativo): the
party concerned by an administrative act may appeal the decision to the administrative
body itself in first instance. This means that the administrative appeal can be heard by
the regulatory agency itself when it is relatively independent, or by the line Minister in
case the regulatory agency is not fully independent.
B) Contentious/administrative trial (Juicio contencioso-administrativo). This appellate
action is heard in the Tribunal Federal de Justicia Fiscal y Administrativa (TFJFA) (see
Figure 4.1). The TFJFA holds a jurisdictional proceedings that examines the legality and
the opportunity of the decision of the agency. The TFJFA plays the role of a first-instance
court competent to hear contested federal decisions. Its prime function is to consider
tax cases, but the Court can review any agency action that involves the imposition of
monetary payments on a private party.
An amparo can be used in both instances. It is available to any party raising the claim
that they are being subjected to an unconstitutional statute or that they are being denied
the rights to due process. Rights to due process are to be understood in a broad sense, as
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Box 4.3. Constitutional and legal context of judicial review in Mexico
The legal and judicial systems were largely shaped in 1917, when a new constitution was
drawn up after the Mexican Revolution. Key is the juicio de amparo, or amparo (literally,
“favour, aid, protection or shelter”) lawsuit which is an appeals system and is a unique
original feature of the Mexican judicial system having originated in the mid-nineteenth
century. Amparos encompass elements of actions of writ for several principles such as
habeas corpus, injunction, error, mandamus, and certiorari, and have been adopted by other
Latin American countries. Amparo is a constitutional injunction that supersedes any other
type of proceeding or resolution, and can be filed every time an individual constitutional
right is allegedly infringed by any public authority (autoridades públicas).
Article 16 establishes the due process clause, and requires that agency decisions
articulate the “legal basis and justification for the action taken”.
Article 103 gives jurisdictional powers to the federal courts to preside over controversies
that arise out of laws or acts committed by authorities that violate individual guarantees
(Subparagraph I).
Among other things, Article 107 establishes that:
●
The trial of amparo shall always be initiated by the injured party (Subparagraph I), i.e. the
judges cannot initiate an amparo procedure ex officio or sua sponte.
●
In administrative matters, amparo may be invoked when decisions cause an injury that
cannot be remedied through any other legal recourse, trial, or defense. It shall not be
necessary to exhaust these remedies when the law that established them, in
authorizing the suspension of the contested act, demands greater requirements than
the regulatory law for trials of amparo requires as a condition for ordering such
suspension (Subparagraph IV).
●
The amparo against definitive decision or awards that put an end to the trial or
proceeding shall be requested to appear before the corresponding Collegiate Circuit
Court (Tribunal Colegiado de Circuito) within whose jurisdiction the authority who
pronounced the decision or award resides, whenever the complaint is based on
substantial violations committed during the course of the trial or on civil or criminal
judgments against which there is no recourse for appeal, regardless of the type of
alleged violations (Subparagraph V).
●
Writs of amparo issued by district judges or Unitary Circuit Tribunals (Tribunales
Unitarios de Circuito) are subject to review. Subparagraph VIII-b implicitly states that
the Supreme Court of Justice shall not review decisions that solely relate to acts of
authority, i.e. Subparagraph I of Article 103 is excluded. However, The Supreme Court
may review certain cases when they are of high interest or importance.
●
Decisions in direct amparo rendered by a Collegiate Circuit Court may not be appealed
unless the decision involves the unconstitutionality of a law or establishes or a direct
interpretation of a provision of the Constitution, in which case it may be appealed to the
Supreme Court of Justice, limited exclusively to the constitutional aspect (Subparagraph IX).
This last case only applies if the interpretation establishes a criterion which is of high
importance.
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Box 4.3. Constitutional and legal context of judicial review in Mexico (cont.)
Besides the constitution, the Amparo law (1936, last amended in 2001) regulates the
procedure itself. It also sets some limits on the procedures, with cases in which a request
of amparo is inadmissible by the competent jurisdictional authority (Article 73 on
improcedencia) and when an ongoing proceeding has to be stopped (Article 74 on
sobreseimiento). In particular, an amparo cannot be filed against the acts of Federal
regulatory authorities where there is: uncertainty or inexistence of the contested acts;
absence of the supposed elements of the violation; principle of definitividad applies – i.e.
cases where no further appeal is possible; when there is no legal interest on the part of the
entity requesting the amparo; when the principle of extemporaneidad applies; when the
supposed violation is ineffective. As for sobreseimiento, the general rule is that the lack of
important elements will stop the process.
The federal judicial system is three-tiered. The Suprema Corte de Justicia de la Nación
(Supreme Court) has final appellate jurisdiction over all state and federal courts. Below are
the Tribunales de Circuito (Circuit Courts), federal appellate courts which are divided into
Tribunales Unitarios de Circuito (single-judge circuit courts) and Tribunales Colegiados de
Circuito (three-judge collegiate circuit courts). The federal courts of first instance are the
Juzgados de Distrito (district court judges) and Jurados Populares Federales (Jury Courts). The
federal judiciary oversees a broader range of cases, and thus holds more judicial power,
than do the judiciaries at the state level. In addition, several federal judicial bodies in
Mexico are not part of the regular federal court system. One of them is potentially relevant
for regulatory agencies: the Tribunal Federal de Justicia Fiscal y Administrativa (Federal Fiscal
and Administrative Court), which deals with fiscal and administrative disputes.
Five types of amparo exist: amparo as a defence of individual liberties or rights; amparo
against laws, as a defence against unconstitutional laws; amparo in judicial matters, as an
examination of the legality of judicial decisions; administrative amparo, as an examination
of the legality of administrative decisions affecting the individual; and amparo in agrarian
matters, protecting the social rights of formers.
the doctrine of the Supreme Court on Article 16 (due process) permits judicial abrogation
of decisions deemed to be arbitrary, capricious, unsupported by Substantial evidence, or
founded on reasoning that is illogical or contrary to general principles of law. Where the
constitutionality of an act of a public authority is questionable, an amparo can be filed by
the party concerned directly to a district court judge, without passing through the
administrative appeal process. This procedure may be used not only by individuals and
private persons, but also by moral persons/undertakings (personas morales), i.e.
corporations, associations, or other legal entities, either Mexican or foreign. This
injunction by a district court may be reviewed by a circuit court (Tribunal de circuito).
The two track system, allows to types of amparo depending on the preceding act (see
also figure in Annex I):
A) The amparo indirecto is employed for administrative appeals, and is heard by district court
judges (juzgados federales de distrito), for a decision by an administrative authority. The
Administrative amparo can be used only when no further ordinary appeal mechanism is
available (función residual). An exception to this general rule applies to those cases where the
decision is insufficiently motivated, or when the suspension of the contested decision
requires more elements provided by the Amparo law. In an amparo contra leyes, the
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administrative amparo can be initiated as a main appeal (función principal). Here
the complainant may seek judicial protection from a district court judge against
unconstitutional laws or regulations, without exhausting administrative or other remedies.
This is relevant for regulatory authorities only as far as they would edict rules of a general
nature. Even though the latter form of amparo deals with laws and regulations that apply to
the general public, the so-called “Otero formula” incorporated into the Amparo Law
requires that an amparo judgement rendered by the court applies only to the individuals or
entity who filed the claim.28 Administrative amparos account for around 25-30% of all
indirect amparos over the period between 1988-2002 (Héctor Fix-Fierro 2002).
B) The amparo directo is used in the case of an administrative trial to the decision of the Tribunal
Federal de Justicia Fiscal y Administrativa (TFJFA). This amparo goes to the circuit courts
(tribunales de circuito), which may be single or collegiate (three-judge) appellate tribunals.
Furthermore, in those cases related to general rules or where constitutionality issues
are questioned, the Supreme Court can also intervene if it considers that the decisions are
potentially unconstitutional. This intervention is on a self-selection basis, as the Court
decides itself whether or not to intervene.
The system involves significant delays and costs
Once the amparo action is initiated, the court can suspend the execution of the decision
that is being challenged, either at its own initiative or at the request of an interested party.
This suspension lasts as long as the amparo case is unresolved. Amparos can therefore be
employed with the sole purpose of suspending a regulatory authority’s decision, thereby
undermining its powers. In practice, this could result in tactical strategies being employed to
delay decisions in civil disputes, where no close constitutional connection exists. As cases
are handled rather slowly in the judicial system, guarantees against abuses of rights for the
protection of freedom and democracy result in practical distortions, undermining the
efficiency of the whole system.
Many amparos may be unnecessary yet mobilise significant resources: 59.6% of
administrative amparos in 2002 resulted in sobreseimientos,29 i.e. the court decided to give up
the case due to a lack of sufficient elements to proceed further (Fix-Fierro 2002). The costs
involved are significant, with the overall public and private costs related to amparo cases at
all levels (federal, state, and municipal) being estimated at about 3 325 million pesos in 2002
(or 250 million euros). A recent estimate of the unnecessary costs at the federal level was
between 650 and 870 million pesos (50-65 million euros) (Fix-Fierro 2002). However, the
indirect costs, in terms of the economic implications of amparo cases for regulatory agencies
with a large influence on key sectors of the economy, might be even higher.
The implications are significant for the regulatory agencies
The administrative appeal has several consequences. The COFETEL and the CNBV are
subject to direct Ministerial appeal, while in first instance, appeals of CRE and CNA’s decisions
are heard by the agency itself. The possibility of ministerial appeal is often a sensitive issue in
the case of regulatory authorities. Ministerial authority can be justified when defending the
ultimate public interest or, in some cases, deciding between conflicting interests. Ministers
exercise a policy-making authority that encompasses interests beyond the smooth functioning
of a given sector. Ministers have broad responsibility for policy-making decisions for issues
that go beyond the interests of regulation. However, the possibilities of ministerial appeal
should remain limited. A way to restrain them is to involve a collective responsibility of the
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cabinet, or of a political instance that represents a whole-of-government perspective. In
Mexico, the possibility of Ministerial appeal is combined with nomination by the president
upon proposal of the minister, and the possibility of dismissal of members of the board of the
regulatory bodies, as is the case for the COFETEL. From this perspective, this agency appears as
the weakest of the four agencies studied in this report. For the CNBV the situation is partly
similar, except that many members of the board, which is an advisory board, come either from
other regulatory authorities, or from the Central Bank which has acquired a significant
reputation for independence in the Mexican context, derived from its legal nature (Organo
constitucional autonomo).
Administrative trials can be heard by the corresponding courts. This possibility of trial
exists for most agencies, as they can levy fines, or sanctions, or define financial obligations
for the regulatees. However, some of these aspects have been recently influenced by the
new law on civil servants’ responsibility (see section on human resources, page 126).
Regulatory agencies have faced an uneven situation, as far as amparos are concerned.
For example, due to its size, the CNA has been exposed to the largest number of amparos.
This agency has been rather successful at dealing with these amparos, as it has won 84% of
the resolved cases. However, 43% of the cases made during the past eight years are still
pending. The situation differs at COFETEL, where only 15% of the amparo cases are pending.
The COFETEL has lost around 45% of its amparos, of which 21% derive from tax issues.
(Amparos against tax issues are the responsibility of the Ministry of Finance.) This may be
related to the legal capacities of the agencies, as the legal department of the CNA involves
309 persons, with 175 attorneys, while the legal department of the COFETEL employs
17 attorneys, of whom only 4 deal with litigation procedures.
This is compounded by the difficulties met by the Competition Authority in relation to
telecommunication issues. The law requires that the Competition Authority decides on the
market power of a firm, in this case the private former incumbent, before COFETEL can
intervene with asymmetric market regulation. The loss of the cases by the Competition
Authority plus the lack of coordination between the two agencies and issues related to
judicial matters have weakened the effective implementation of the regulatory framework
that had been put in place.
Mexican discussions on reform options
The need for a reform of the amparo has been widely acknowledged in Mexico. There
is some debate about introducing fines on the persons/undertakings, who could have
abused the amparo guarantees for strategic reasons. Other proposals include ensuring that
the district courts check more strictly if sufficient elements exist to proceed further with
an amparo. Some have also suggested that specialised specialised federal courts in charge
of considering appeals against the actions of the regulatory authorities be established.
Their verdicts could be brought to the circuit collegiate courts for appeal. In any case, the
amparo system can not be repealed without first enacting new laws and amending the
Constitution. This is why in late 1999 the Supreme Court appointed a commission in
charge of drafting a new amparo law, in order to simplify and improve the administration of
amparos. The commission submitted a draft law to the Supreme Court in April 2001, which
received limited Congressional support. The Supreme Court’s draft law on the reform of
the amparo is still under debate in Congress, and does not seem to involve any significant
changes to the system, at least from the perspective of the regulatory agencies. The only
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significant change, mentioned above, concerns the so-called “Otero formula”, which the
new proposals propose to eliminate.
Special appeal bodies
The legal culture of the country concerned will also affect how appeals are processed by
the judicial system. Difficulties are minimised in common law systems because technical
regulatory issues can be considered in the ordinary judicial framework to challenge
executive decisions. By contrast, the legal culture and the role of the judicial system in the
countries of Roman or Germanic law tend to limit the possibility of effective appeal on those
grounds. In Mexico, the difficulty is compounded by the lack of economic and technical
expertise within the judicial system, as courts are not specialised. Regulatory authorities
may assist the courts in some of the proceedings, but only in a limited way. This is why in
some countries, appeal systems have been designed with a single, specialised body or court.
This makes it possible for judges to attain greater expertise in regulatory matters of an
economic nature, and to fully address the economic implications of legal decisions. For
example, in 1998 the United Kingdom created the Competition Appeal Tribunal, a specialised
court for reviewing the decisions of regulators and the competition authority.
In the Mexican context, the right of amparo is backed by the Constitution and also
involves a law. Therefore, a framework that would better serve the needs of efficient and
accountable independent regulators would have to address those issues, with an
intervention at the legal and constitutional level. This would involve including a proper
definition of regulatory authorities in the Constitution, a significant institutional challenge.
The possibility of extra-territorial appeals (WTO/NAFTA tribunal)
The integration of the Mexican economy into the global economy, with the WTO and
the North American Free Trade Agreement (NAFTA), opens up other possibilities for
making appeals, either through the NAFTA dispute settlement procedures or the WTO
Dispute Settlement Understanding. Under NAFTA Article 2005 a complaining party can
choose to settle disputes either through the NAFTA or the WTO. In a recently solved case
taken to the WTO dispute settlement, the US sought redress against anti-competitive and
discriminatory regulatory measures regarding international settlement rates. After the
panel issued its report, Mexico reached an agreement with the US to comply with the
recommendations of the Panel (see Chapter 3).
Institutional and democratic dialogue
Strengthening relations with Congress
Congress plays a key role in the Mexican democratic debate. In many OECD countries,
regulatory authorities often wish to maintain dialogue with Congress, to take part in the
democratic system while maintaining their independence from the ministers. The
situation differs in Mexico, as most regulatory authorities are simply a part of the Executive
which can be called upon request for hearings in Congress.
Most agencies present annual reports. The CNA also publishes the strategic water plan for
the next six years. This prerogative reflects a more general responsibility, including strategic
policy making, which would not normally be devolved to an autonomous agency in other
countries. Regulatory agencies do contribute to the parliamentary debates. For example, the
CRE participates in hearings with the local and federal Chamber of Deputies upon request. The
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CNA also gives periodic reports to the House of Representatives. The CNBV is accountable to
Congress as an agency of the Ministry of Finance. The COFETEL administratively reports to the
SCT Ministry, and is subject to exposure to Congress upon request.
Encouraging discussions on regulatory issues in Congress could help. A possibility could
be to formally organise a public hearing following the submission of the annual report. The
annual report could also include options for reform and general recommendations that could
be offered for Congressional debate. This could also be coupled with the requirements for
performance assessment and with the role of the Auditoria Superior (see section Powers for high
quality regulation). These reports could also serve to explain the regulatory authority’s operating
principles, which would subsequently improve the transparency of the regulatory framework.
Contact and dialogue with Congress are particularly important given the significance of the
regulatory initiatives contained in legislative proposals tabled by senators or deputies.
Proposed legislative changes should be consistent with regulatory policy, and expert
information should be provided when needed.
The direct dialogue with the citizens and the medias
Mexico is developing an active and vibrant democracy, with the press, the internet and
the general media. Regulatory authorities need to continue to build up their reputation in
this debate. They all have large bilingual websites, with key information for citizens and
businesses. However, the situation differs across the agencies. The CRE and CNBV have
established a policy of consistent and timely announcements of their activity through the
media, as part of a commitment to transparency regarding the dissemination of their
activities, with periodical press releases and press conferences. This does not seem to be
as developed in the other agencies.
All of the Mexican regulatory authorities are subject to the transparency and
notification requirements of the Transparency Law (LFPA) (see section Powers for high
quality regulation). This involves maintaining direct dialogue with the regulatees, but may
not provide a substantial contribution to the public debate. In the financial sector, if the
Central Bank intervenes actively in the debates, the CNBV does not seem to take a very
high profile, as the key role is for the Minister. The CNA also does not seem to take a very
active role, in a field that is subject to intense political discussions and pressures from its
constituency.
The dialogue with citizens and the media is important in strengthening the legitimacy of
the agencies, particularly if they are to acquire more independence. Needs for public openness
also require to be carefully balanced. Regulators must hold public consultations to ensure their
legitimacy but in order to be effective they also sometimes need to hold confidential meetings,
particularly when major private or public interests are at stake.
Securing proper material conditions for independence
Appropriate resources are necessary for independence to function properly, and for
the legal aspects to be implemented in a satisfactory manner. This concerns both financial
and human resources. A key factor of independence is the technical competence of the
staff. Agencies need to be able to form independent opinions on issues without relying on
external competencies. However, the budget of the regulatory institutions under review in
this chapter, is subject to annual negotiations with the line ministries.
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The financial resources
The regulatory agencies are mostly financed by the general federal budget (see
Annex D). This budget is partly dependent on oil, and the Mexican economy has faced
significant macroeconomic shocks over the past 20 years. The core regulatory agencies
however, often represent relatively modest outlays from a macroeconomic perspective.
Both the CRE’s and Competition Agency’s budgets are modest. The COFETEL’s budget
is roughly three times higher, and the CNBV’s budget eight times higher. The COFETEL and
the CNBV seem to enjoy a relatively high level of resources compared with their core
ministries. However, the size of these agencies remains relatively modest and well in line
with that observed in other countries. The CNA’s level of resources is on a different scale,
reflecting to some extent the wider responsibilities of the agency, which are of a different
nature, and are more comparable to those of a whole Ministry.
The current set of financial rules for public finances do not allow for much financial
autonomy for the regulatory agencies. In the case of the CNA, this was a fight of the
founding fathers of the agency in the 1930s, that was lost then and that had significant
implications for the future of the sector in Mexico. At the moment, the fees charged on
water users may represent 72% of the budget, but they transit through the general budget,
and the budget for the CNA fully depends on the general budget allocation. The same
applies to the CNBV’s budget. This situation differs from a number of OECD countries,
where sectoral regulators are either financed entirely by fees levied on the regulated
industry or by a combination of budget funds and extra-budgetary resources (Figure 4.5).
This is often designed to ensure the independence of the agencies, whose budgets present
little budgetary outlays from a macroeconomic perspective. The COFETEL, the CNBV and
the CRE all have relatively small budgets. The CNA given its current role and functions, has
a much more significant budget, which affects significant parts of the economy.
The overall level of financial resources has not been a core factor for the three
“smaller” agencies in Mexico, even considering the tense situation of the public finances.
However, the budget of the CNA has been affected in the past by the lack of resources,
particularly after the crises of 1982 and 1995. This problem has been to some extent
Figure 4.5. Financing sources of OECD regulatory authorities
Fees levied on the regulated industry
Number of agencies
30
State budget and fees
State budget only
Financial sources for regulatory agencies
25
20
15
10
5
0
Competition
Financial
Economic sector
Energy
Telecom
Source: Preliminary data collected by the Secretariat from published sources. Tentative set of around 22 OECD
countries.
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mitigated in recent years by increasing reliance on self financing by users of the
infrastructure. The key factor is the discretion that could be granted to the agencies in
managing their funds. In other countries, some agencies may make a direct submission to
the state budget. This goes directly to Congress without direct control from the executive.
This is feasible in Mexico as the experience of IFAI shows (see Annex E). As
independence was a key factor for IFAI, the first members of the board to be nominated
insisted on the possibility of submitting their budget directly to Congress, as a way of
ensuring their full independence, under the threat of resignation. This helped them to
establish their authority. This does not imply that financial resources should be managed
outside the normal framework of public finance rules when using public funds. The
agencies remain under the control of the National Audit Office (Auditoria Superiora) as well
as of the Comptroller General of the Ministry of Public Administration (Secretaria de la
Funcion Publica) (see section Assessing the performance of regulatory authorities).
Human resources
The availability of highly-motivated and technically qualified staff is key in ensuring
the success of independent regulatory authorities. Mexico enjoys a relatively large pool of
highly skilled human resources, many with degrees from top ranking US and EU
universities. The country as a whole is competing with the North American labour market
for some of the best skilled resources. The regulatory authorities also have to compete with
large public or private sector companies in the fields of telecommunications, energy and
financial services to obtain the most talented staff. Obtaining high quality staff is
necessary to match the technical competence of the regulated parties and therefore
establish regulatory authority.
A solid professional civil service framework did not exist until recently. In the
traditional administrative context, political ties play a significant role, even for medium
ranking staff. There is also a high staff turnover across the public and the private sectors,
with the public sector being sometimes a launching pad for a career in the private sector.
This generates two sets of equally difficult challenges. The first is to ensure
independence from the ministries, and the second from the regulated parties in the private
sector. It would appear that the regulatory agencies have enjoyed a relative autonomy in
fixing the salaries of their top employees, and have been generally able to attract
executives from the Mexican elite to their top positions. Until 2003, the lack of a proper civil
service framework presented a number of challenges, as it did not offer a proper exit
solution if a member of the board of a regulator was to resign or to be replaced at the end
of its mandate. A partial solution adopted for the competition authority opting for very
long terms for commissioners, such as 10 years, often relying on academics, may not be
sufficient for all the sectoral agencies.
Staff members from the regulatory agencies are subject to the 1982 law on the
responsibilities of civil servants, 30 but also to the new law on the administrative
responsibilities of civil servant of March 2003.31 This last law presented significant
advantages and drawbacks. Its advantage is to establish rules for conflict of interest in the
public sector, making sure that officials cannot exert their authority to further their own
interests. These rules have the advantage of increasing their independence from the
regulated parties. The law also stipulates a cooling-off period of one year before taking a
job in a sector, where supervisory responsibilities have been exercised. The one year period
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is however too short to be really effective. The practice in other countries, such as France,
would be for a ban of 5 years, to prevent senior officials from being biased in taking
decisions while in office in order to optimise future career. However, this ban can only be
implemented as part of a general professional civil service career, to ensure other options
are made available to senior staff members of the agencies, and adequate compensation is
provided to them during the cooling-off period. One major drawback of this law could
undermine the ability of regulators to effectively exercise of powers of the regulators: civil
servants are now personally responsible, on their own income and assets, of any loss of
resources of the State or a federal public entity. This feature has been used as a threat in
relations between some regulators and federal public entities, limiting the exercise of their
regulatory powers.
The absence of a proper civil servant status is currently being addressed as part of the
new law on the Professional Civil Service enacted on 3 October 2003.32 This law defines a
general framework and offers the possibility for its gradual implementation. Public
administrations will be allowed to open formal open competition for the posts concerned
by this law (senior and middle upper ranks of the professional staff in the administration).
These posts correspond to the bulk of staff in a regulatory agency. The law does not include
the highest civil servants in the Presidency, or the Deputy Ministers or the heads of the
public service. The law is currently being experimented at CNBV and CRE. The CRE, for
example, is experimenting with a pilot implementation of the law that would form a group
of professionals from various disciplines and who are qualified to perform the core and
auxiliary activities according to the agency’s mandate.
The board member requirements are g enerally less clear and relatively
heterogeneous. They are stated for COFETEL in the Decree creating the agency. However, it
is not clear whether they clearly state the interdiction of conflicts of interest, including the
ban of working in the sector for a period of one year, which is too short to be really effective.
The CNA has inherited an oversize staff from its predecessors (see section Current
trends and challenges in the financial, water, energy and telecommunication sectors). This included
taking on large numbers of unqualified workers, as a way to contribute to employment
policy under the political bargaining framework which prevailed under the functioning of
the old one-party closed-economy system. About 79% of the staff members are member of
the labour union. A smooth policy of a gradual reduction in the workforce has addressed
this problem. There were 17 000 staff members in 2003 against 19 500 in 2002, 25 000 in the
early 1990s,33 and over 34 000 in 1989. 85% of the staff works in regional offices with
operational functions in irrigation districts. Significant staff redundancies still exist, which
could represent up to 20% of the staff.
Assessment of policy implications
Strengthening the independence of the Mexican regulatory agencies is the core policy
option discussed in this report. As in other countries facing similar challenges, the move to
independence will also need to be accompanied with clear mechanisms ensuring for
accountability, while not undermining independence. Some aspects go well beyond the
regulatory agencies themselves, as is the case with the amparo appeal mechanism. It is also
possible that at certain periods, and with political willingness, some agencies may exert
their powers with relative independence, such as has recently been the case for the CRE.
However, it will not be possible to improve significantly large aspects of the Mexican
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economy, without first reforming these agencies. A strengthened independence has to be
accompanied by a clear and non conflicting definition of the missions and powers of the
agencies, as well as a redefinition of their relationship to the ministries.
HORIZONTAL DESIGN
Horizontal design issues are important when considering independent regulators as
part of a comprehensive regulatory system. This requires addressing several economic
sectors with a whole of government perspective. The key aspects are in relation to the
financial sector, the multiple functions of the CNA and the horizontal relationships of all
agencies with the Competition Authority (CFC).
Horizontal design issues, by function or sector
Three of the agencies studied have a clear economic regulation function, while the
function of the CNA differs as it relates to environmental matters. They are all related to
specific, and generally well defined economic sectors. A broader sectoral oversight is generally
more desirable as it puts regulators further away from specific interests. Regulators operating
within a single sector often have multiple functions. They can be placed in the situation of
making policy choices, without having a broad vision or the democratic legitimacy to do so.
The alternatives to multiple objectives and functions can, in theory, be avoided by
specialised regulators with a well designed function, clearly focused on market efficiency
and/or safety. However, increasing the number of strictly specialised regulators could
also result in other difficulties, such as a higher risk of capture by a particular sector,
institutional rigidities, and difficulties in dealing with broad sectors of the economy as they
are merged as a result of technological change. In addition, coordination problems arise
when multiple agencies operate in a broad sector.
The institutional design by sectors
The design by sectors generally reflects clear broad economic sectors for three of the
regulatory agencies, but is more confusing for the financial sector (see Annex B, General
Description of the Four Mexican Regulatory Agencies). In the energy sector, the CRE has
responsibility for electricity and gas, as is the case in a number of other OECD countries.
Specific aspects relate to the relative extent of regulation and market competition in electricity
and are discussed in another chapter. The issues of oil (upstream) and the regulation of oil
resources involves major political and constitutional challenges that will not be discussed in
this report. The mandate of the CNA is also very clear, in terms of its sectoral distribution.
In the case of telecommunications, COFETEL’s responsibilities reflect the experience of a
significant number of countries. However, the trends and technical progress in the sector
would call for a growing convergence between the Internet, telecommunications, TV and
media issues. In some countries, regulatory agencies have been set up in these fields to protect
public liberties and to promote the diversification of public opinion. The question of whether
this sector-specific regulator should be merged with the telecommunication regulator can be
asked. In Mexico, oversight of the contents in radio, TV and movie industry, is still with the
Interior Ministry.34 The COFETEL has been given regulatory oversight for pay TV and audio. As
a result, these activities are not fully integrated with the general TV, radio and media activities
in terms of the regulatory framework. However, as the COFETEL governance arrangements
remain weak, the conditions may not be ready yet for merging the regulatory oversight.
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Within the financial sector, the CNBV has a mandate mainly for banks and
securities,35 merging the functions of two previous regulatory authorities. Several other
independent regulatory institutions exist for pension funds (CONSAR), for insurances
(CNSF) and for non banks where the ministry of finance has a direct responsibility. The
coordination which takes place at the level of the CNBV’s board between the different
regulators mitigates this to some extent. Several countries, such as the United Kingdom,
Germany or Hungary, have opted for a broad institution to take charge of the financial
sector with an integrated approach. France has chosen a relatively integrated approach,
while leaving aside the insurance sector. The fragmented nature of the financial sector’s
regulatory framework has been a cause of concern for the regulated entities. The current
structure results in the duplication of functions and conflicts of interests between the
various entities, the Ministry of Finance, the Central Bank, the CNBV, the IPAB and the
Condusef. This also generates administrative costs. For example, the largest Mexican Bank,
BBVA Bancomer, has expressed concerns on this topic, as the regulatory agencies in the
financial sector issue 147 monthly requests for information, which means in 474 emissions
of information for the bank (BBVA Bancomer, 2000).
The potential gains for Mexico of a direct merging of various supervisory entities
would need to be balanced with other considerations. The CNBV has been given a mandate
primarily in terms of ensuring stability and prudential oversight of banking activities
mainly, which has been quite successful to date.36 This has led to a focus on stability, with
less emphasis on competition aspects, and a potential risk of capture by the regulatees. As
the CNBV is currently the largest of the financial regulators, a potential merger could result
in the weakening of the situation of some other segments of the market, which play an
important role in filling the gaps left by the banking system. The level of banking credit to
the economy is relatively low, and a dynamic non bank banking sector is needed to
compensate. In terms of pension funds, an independent oversight may also be desirable in
order to limit the possibility of conflicts of interest, as banks are also large providers of
financial instruments used by pension funds. A first priority might be to better define the
precise limits and relationships of CNBV with other regulators and to improve the
coordination with the Ministry of Finance, before reshuffling the whole financial sector.
The design by functions
Three of the regulatory agencies have relatively clearly articulated objectives with an
economic content (see Annex K, Objectives and Powers). The energy regulator has to achieve
energy efficiency through economic regulation, but it also includes objectives such as
ensuring public service provision, promoting competition, protecting user’s interests,
achieving adequate national coverage, and attending to the quality, dependability and
security of the public service. The CNBV’s mandate is to ensure the stability and prudential
oversight mainly of the banking and securities activities. The only difficulty is that it also
involves the “public interest”, which is vague and undefined. The role of the CNBV does not
include the protection of consumers in the financial sector, which is conferred to
CONDUSEF. It also does not mention the preservation of healthy competition and the
search for efficiency within the sector. The risk is that prudential standards may either be
attained through high margins and rents with high commissions and restraint on credit, or
via efficient and lean management. Some empirical evidence (see section Current trends and
challenges in the financial, water, energy and telecommunication sectors) would tend to suggest
that the situation might be tipped towards the former, as the current regulatory framework
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tends to favour the position of the banks and limit the opportunities for businesses and
consumers. This situation reflects the rebalancing that occurred after the 1995 crisis but
current conditions might call for a readjustment.
With regard to telecommunications, the definition of the functions of COFETEL would
appear to be relatively broad, as they include social development and national integration
together with competition and efficiency. COFETEL is the only agency where the reference
to competition explicitly appears under key objectives. References to social goals are not
unique in the field of telecommunications. As is the case in the majority of OECD countries,
telecommunication regulation also involves regulation on universal service. Mexico has no
clear obligations for universal service in its laws, whereas many other countries do. No
funding mechanism has been set up which would levy fees to make sure that universal
service is ensured on a cost-effective basis (see Annex L, Regulations on universal service).
Mexico is facing the difficulties that come with a private market, with partly unregulated
prices, together with the absence of a public entity which could ensure a type of universal
service, with cross-subsidisation. As a result, access to basic services is problematic for the
poorest part of the population, partly due to high installation costs.
The need for universal service is exacerbated by the social differentials which exist in
the Mexican population, where the poor represent a large share of those without access.
However, the current former incumbent is now managed from a purely private perspective,
as a listed company, which offers little scope for cross subsidies. The definition of universal
access in Mexico is linked to bringing telephone lines to communities with a population
over 500 inhabitants. Telmex’s concession title includes such coverage commitment, which
was fulfilled by 1994. Social and rural coverage programs are the SCT’s responsibility which
has promoted rural telephone service through several schemes with different service
providers including Telmex. The SCT, which manages a social coverage fund as part of its
policy making function.37 These efforts may fall short of reaching the aim of providing
universal service, as they facilitate access, with free of charge start service, but do not have
any impact on the consumption of the service itself, either through a subsidy or a cap in
charges. In addition, poor or middle income groups may not all benefit from these
targeted efforts.
The major difficulty with the CNA
The CNA has a strong historical, institutional and sector identity. This results in a
multiplicity of functions which undermine de facto the possibility for these to be
simultaneously reached. The agency was set up to address the specific needs for
specialisation in government decision-making and to monitor a specific sector of the
Mexican economy. In the process, the authority has been organised in a way that followed
the structure of the sector itself, particularly given the challenges of irrigation and
agricultural development which were faced by Mexico in the early 1930s.
The CNA is to perform sixteen different functions at the same time, some of which are
of a regulatory nature, and many of which are not. Some of the functions of the CNA
comprise those normally devolved to a Ministry, such as formulating the long-term
National Hydraulic programme, or issuing standards on hydraulic aspects. The CNA could
be consulted for official public advice; releasing of standards is normally a ministerial
remit. In some functions, the agency has an operational capacity such as managing the
federal hydraulic infrastructures. Apart from advising the government based on its
expertise, the regulatory functions of the CNA are: to sign contracts of concessions for the
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service provision under its responsibility; to manage and guard national waters and their
utilities and to control water quality; to issue concessions or assignment titles; to have a
mediation function when water-related conflicts arise. The advocacy function, promoting
the efficient use of water and its preservation, is also clearly within the realms of a
regulator. The functions of executing the fiscal attributions concerning the recovery of
contributions (for which the CNA has no interest, as they are paid to the general budget),
do not belong to the normal responsibilities of a regulator. Additional functions such as
research, education and technical development could also be located within a regulatory
agency. The enforcement, supervision and sanction function are also the normal
responsibility of a regulator.
The core problem is that the CNA has a double nature. In theory, the purpose of a
water regulatory authority, in a country such as Mexico facing acute shortages of water,
should be to act as a national water watchdog, preserving the future of the country. In
practice, the CNA faces an ambiguous situation. Its “regulatory angle” is often dominated
in practice by its “operational angle”, which was the historical reason for the setting up of
the CNA. The original mission of its predecessors was to provide water for free to poor
farmers in order to foster the agricultural development of the country. There is a
fundamental conflict between the historical vision that preceded the setting up of the CNA
and its current role.
This conflict is made more acute today as the nature of Mexico as a country and as an
economy has changed. The bulk of Mexico’s wealth now comes from services and industry,
which pay the bulk of the water fees, while consuming a small share of the total.
Supporting farmers via cheaper water is also not unique to Mexico. For example, in France,
farmers are estimated to cover only 1% of water contributions, while consuming over 40%
of the total consumption. However, the current Mexican situation clearly places the
country in an unsustainable situation in the long term. Many wells are being exhausted,
and the major urban centers and developed regions of the country face a long term risk of
shortage of water.
This is also why the situation has not fundamentally changed over the years, even if
some progress has been made in some areas. The setting up of the CNA in 1989 started
a period of transition, away from the historical legacy, directly linked or under the
supervision of the agricultural sector, towards a more management-oriented agency,
rationalising the management of regulations in the sector somewhat, and raising the
coverage of cost of maintenance by the users. Growing decentralisation of some functions
have changed the CNA, with eight of the most important water programmes being
devolved to the states, as 27 states now have their own water laws, and 13 have their water
commission. This changes the nature of the CNA to one of standard setting agency, with
specialised technical support. The agency keeps the construction and maintenance of
strategic water infrastructure.
The transition from a very large integrated agency to an efficient and streamlined
regulator, with clearly identified objectives is a long-term goal, and will not be easy to
attain. Combining multiple regulatory functions in one single agency or ministerial
department is not unique to Mexico either. Integrated public structures face implicit
conflicts of interest, as they are conferred many different conflicting functions at the same
time. However, as part of a transition to a modern regulatory state, a better identification
of the functions will help to reorganise the structures in ways that will better serve the
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long-term interests of users and of society as a whole. Without clear distinction between
the core missions of the CNA, and possible devolving of the other functions either to State
level or to a Ministry or a management or public work agency, it will be very difficult for
Mexico to ensure the sustainability of water supply in the future.
The coordination with other agencies
The Co-ordination between the Regulatory Agencies and the Competition
Authority (CFC)
The distribution of responsibilities between the CFC and the sectoral agencies
This core issue is at the heart of defining a “whole of government” perspective and an
efficient and undistorted enforcement of competition law across the various sectors of the
economy.38 The Competition Authority (CFC) is in charge of the enforcement of the 1993
Federal Law of Economic Competition. The question arises as to how to enforce
competition in regulated sectors, such as energy (gas or electricity), telecommunications
and financial services. As for the water sector, competition may occur when water
management services become privatised utilities, but this may only concern a limited
number of urban users in Mexico. The CFC has stronger independence requirements than
the regulatory agencies studied in this report, (see also Annex E) but it also has limited
resources, with a staff under 150.
Four main possibilities have been identified by the OECD (OECD 2004b) to organise the
relationship between regulators and competition authorities:
●
Regulators are the principal enforcers of competition laws, if any, applying to their sector.
●
Competition Agencies are also the principal economic regulators.
●
There is no economic regulation in one or more sectors subject to such regulation.
Instead, the competition agency applies general competition law to accomplish some or
all of the objectives associated with economic regulation.
●
A general mandate-driven division of labour exists, with competition law being the
exclusive mandate of the competition agency, and regulation, the exclusive mandate of
the economic regulators.
Mexico clearly falls under the last category, within a broad horizontal mandate of the
CFC. This should ensure a clear division of powers and functions between the agencies. As
a result, the agreements or provisions made in the laws to specifically organise the
dialogue and the cooperation between the two types of agencies remain limited. A number
of coordination mechanisms exist, generally in the form of an opinion of the CFC for
determined regulations, in areas such as telecommunications, gas, road freight, maritime
transport, civil aviation and railroads. In other countries, where powers have been
organised under a partly concurrent approach, such as in the United Kingdom or in France,
systematic consultation and collaboration occurs, and may be stipulated by the law.
In Mexico, the CFC is mentioned explicitly in the Telecommunication law (1995), in the
natural gas law (1995), and in the Credit Institution Law reformed by Congress in
December 2003. The CFC can be called upon to determine the relative competitive situation of
a market. The CFC may determine whether effective competition exists, or whether one of the
agents has substantial market power, such as in the case of telephone services. The CFC also
reviews the authorisation of economic agents to participate in public auctions for concessions,
licences and permits, such as in the case of natural gas transportation, storage and
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distribution, or in terms of permits and licences for wireless services in telecommunications.
The CFC also plays an active role in promoting competition in regulated sectors through its role
in privatisations, design of legislation, allocation of concessions, permits and licenses. The
sectoral legislations do not provide the CFC with a specific role in the bidding for licenses or
permits in the water sector, nor for licenses in the financial sector. However, it participates in
the divestment of financial public and IPAB’s assets by assessing the prospective auction
participants.
As the CFC is also clearly involved in the design of new regulations, within the new
regulatory process, new regulations should in theory avoid conflict between regulation and
competition policy. However, CFC’s opinions are not always adopted; they are non binding
and the consultation processes are not always public.
In practice, a number of overlaps occur despite the division of responsibilities.
Significant differences of appreciation have also emerged between the CFC and some of the
regulators involved, the COFETEL in particular. The Telecommunication Law contains per se
a prohibition of cross-subsidisation between activities, and of discriminatory treatment,
whereas the CFC considers that cross-subsidisation and discrimination may be efficient
under certain circumstances.39 Generally, the collaboration between the CFC and the
sectoral regulators was not well developed in the past. However, the contacts have been
more regular in the case of the CRE, where a collaboration agreement was subscribed
in 2003. The CFC has been actively involved in the establishment of the LPG distribution
price caps. Some collaboration also exists between the CFC and the COFETEL, which will be
strengthened through an agreement pending execution.
A number of unsatisfactory cases have arisen which have already been identified by
the 1999 Report, and which have been compounded by the amparo process (see above).
None of the recommendations of this report, in terms of extending the authority of the
CFC in the regulated sectors, has either been implemented or considered by Congress
(OECD 2004b). The CFC has in effect cooperated with the COFETEL. Legal weaknesses in the
CFC process have been used by the incumbent as part of the amparo process and have
stalled the process of CFC intervention. Based on the original CFC resolution, COFETEL
instrumented specific regulation to control the five markets where the CFC had found
Telmex to possess substantial market power. However, these had to be suspended given
the judicial process. The current system does not impose a systematic cross-consultation
according to the type of agencies, and in particular for seeking public advice from the CFC
before reaching a sectoral regulator’s decision or for substantiating CFC’s decisions on
dominance with the sectoral regulator’s expertise.
This “cross-agencies” divide is also visible in the financial sector, where coordination
between the CNBV and the CFC is not developed. The supervisory powers of the CNBV do
not apply to financial competition, which is the field of the CFC. However, the role of the
CNBV clearly relates to the prudential aspects only. From a strictly prudential perspective,
the absence of fierce competition in the financial sector could also be beneficial for banks
that are consolidated and protected from failure. However, the limits of this approach, after
a period of healthy consolidation in the banking sector, is that high margins and a semioligopolistic situation in the banking market might contribute to the low use of financial
services and credit.
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Co-ordination mechanisms
The relationship, formal and informal, between the competition authorities and
sectoral regulators is central in determining how competition principles are applied across
the economy. A shared policy view in ensuring consistency and agreement over what to do
best serves the purpose of an efficient and coherent regulatory framework in the long run.
Where relationships need to be improved, formal coordination processes can play a
significant role. The lack of coordination between sectoral regulators and the CFC has been
identified by past reviews as an issue which needed to be addressed in Mexico.40
At the moment, few specific agreement exist between the CFC and the sectoral
regulators, even if the laws that govern the gas and telecommunications sectors include
some references to horizontal coordination. A welcome first step is the collaboration
agreement between the CRE and the CFC in 2003. Agreements are underway between the
CFC and the COFETEL, COFEMER and PROFECO. The lack of such agreements has not
prevented the CFC to issue non binding opinions on competition matters in regulated
sectors, or to find ad hoc collaboration when necessary.
Such agreements signed between regulatory bodies exist in other countries. Further
progress in this field in Mexico might be hampered by the fact that the agencies are only
deconcentrated parts of the ministries, and that they may not engage in such formal
agreements by themselves, as long as they do not enjoy a level of independence and legal
autonomy which could be comparable to that observed in other countries. A mixed and
diverse appeal system does not serve the purpose of coordination. Systematic and public
consultation and exchange of information between agencies could help to make the
framework more effective.
Co-ordination with the consumer organisation and the Consumer Protection Agency
Cooperation with consumer organisations is another important aspect if regulators
are to contribute to improving economic and social welfare. This is even more important in
Mexico as the Federal Consumer Protection law is not enforced by the CFC but by a
different agency, located in the Ministry of Economy, the Federal Prosecutor for Consumers
(PROFECO). However, communications between PROFECO and the CFC are not well
developed (OECD 2004b). In addition, a special body exists for the clients of the financial
sector, the National Commission for the Protection and Defense of Financial Services Users
(CONDUSEF). This is a deconcentrated agency of the Ministry of Finance, the purpose of
which is to promote, advise, protect and defend the rights and interests of users of
financial products or services. The mandate of CONDUSEF applies to the whole of the
financial sector, beyond the competency of the CNBV. CONDUSEF and PROFECO signed a
cooperation agreement in 2002. PROFECO and COFETEL decided in November 2003 to join
efforts to better serve and inform the consumers. CRE collaborates with PROFECO in
various matters regarding PROFECO’s powers to regulate the contractual relationship
between the supplier and the consumer. This also involves informing users of natural gas
and of LPG on how to pay and use these services.
Consumer associations in Mexico appear to be under-developed on an independent
basis in general. This is a weakness in the institutional debate, since these groups can also
help to contribute positively to the national debate.
In the water sector, dialogue with the users plays an important role at the level of the
Basin Councils (Consejos de Cuenca), and also in establishing a sound culture of water. The
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CNA has set up a Citizen’s Movement for water. This reflects the increasingly decentralised
nature of water management in Mexico and the progress made by the CNA in this direction.
In order to foster stakeholder participation, a National Water Consulting Council and
26 State-Citizen Water Councils have been established. This helps to create various fora to
install a dialogue between water users and government organisations at different levels.
The coordination with international networks
International networks also serve as a useful tool in the technical coordination of
regulatory authorities. They contribute to harmonising worldwide standards. Mexico is
largely integrated to the North American economic area. In sectors such as energy,
telecommunications and finance, the regulatory authorities maintain close contact with their
US and Canadian counterparts. The Mexican energy and telecommunications regulators
participate in the international activities organised by their peers. Among contacts with other
regulators, the COFETEL has also established a specific cooperation agreement with the French
regulator, ART, and is in close contact with the Indian regulatory authority. Both countries face
similar challenges, of having on the one hand a developed and sophisticated market and large
parts of the population still excluded from accessing services on the other hand. The CNBV
also participates in a number of international networks in the financial sector. The activity of
the CNA appears to be more domestically oriented. Some of the cross-border issues in Mexico
are also addressed by a separate multinational entity.
Assessment of policy implications
Regulatory authorities need to be properly designed to fully accomplish their
objectives. While the four Mexican regulatory authorities have generally a strong “sectoral”
identification, significant room for further improvement exists. The high level of
fragmentation within the financial sector could call for increasing coordination, or even for
merging some regulatory functions on a limited basis. The major difficulty lies with the
situation of the CNA and the contradiction in its functions. Except in the energy sector and
the CRE, the lack of coordination between the sectoral regulators and the competition
authority could also call for strengthening the mechanisms for cooperation. Coordination
with the Consumer Prosecutor is not well developed although some progress has been
made recently.
POWERS FOR HIGH QUALITY REGULATION
Independent regulatory authorities are increasingly granted powers across OECD
countries, often by law, but also following subordinate regulation. These powers refer to the
authorities’ legal right to give advice, make rules, monitor and inspect, sanction, grant
licenses, authorisations, set prices, and settle disputes. The scope of these powers varies
widely across OECD countries, since they may not only be exercised by regulatory agencies
alone in an exclusive way, but also by agencies and other bodies and/or the government. In
some cases, agencies only exert some of the above mentioned regulatory powers.
The level of regulatory power is often linked to the independence of the agencies.
However, this is not necessarily always the case, as the Mexican example shows. Legal
attributions alone are not always sufficient to guarantee the efficient use of these powers
if the agency is subject to external influence by the government or by the regulated
industry. They need to be backed by additional institutional guaranties, in terms of secure
financial resources, or provisions against conflicts of interest for senior staff.
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The powers of the Mexican regulatory authorities, a domestic
and an international perspective
Regulatory agencies enjoy greater powers when they are created by law. Three of the
agencies considered in this report were created by law. COFETEL is mentioned in the
telecommunications law, but is set up and organised by decree.
The powers allocated to CNBV, COFETEL, CRE and CNA
The CNBV, COFETEL and CRE have generally “economic” powers (see Annex K, Objectives
and Powers of the Mexican Regulatory Agencies). The CNA has additional environmental, health
and safety functions. (Additional supervisory or quasi-judicial powers will be discussed
separately). Economic administrative powers include granting and revoking licenses and
permits, setting prices and reviewing and approving contracts between regulated companies:
●
Granting licences and permits, CRE: gas transport, distribution storage; electricity: self supply,
cogeneration, IPPs, import export; LPG: transportation and distribution pipelines. CNA:
concessions or assignment titles for use and exploitation of water. CNBV constitution and
activities of financial bodies.
●
Price setting, this is the only case for CRE: gas: setting the price mechanism for first-hand
sales, and setting maximum tariffs for open access in transportation, storage, and
distribution; electricity: guidelines, procedures and terms and conditions for wheeling
and transmission services charges.
All the four agencies have advisory power, i.e. based on their technical and legal
expertise, they can submit unbinding advice to line Ministries in relation to policy and
regulatory matters. Additional powers also include:
●
Rule making (Standard setting): COFETEL: general administrative rule making; CNA:
standards on hydraulic matters; CNBV: issuing prudential regulation; CRE: issuing
directives and official standards.
●
Supervisory/sanction: CNA: enforcing water law and imposing fines; CNBV: suspension of
operations, administrative sanctions; CRE: administrative sanctions.
●
Dispute settlement: COFETEL; CNA and CRE: mediating in conflicts at the users’ request.
●
Fiscal attribution: CNA.
The price setting power is generally limited. In the energy sector, the CRE participates
in the Electricity Tariff Setting Commission, with the Ministry of Finance, the Ministry of
Economy and the Ministry of Energy. However, the Ministry of Finance (SHCP) is ultimately
responsible for setting the electricity tariffs but has very limited resources.41 In the nationwide natural gas and LPG industries, CRE establishes the methodology to calculate prices
by publishing the First Hand Sales Price Methodology, applicable to the sales of PEMEX. As
for the local distribution companies of natural gas, CRE determines the maximum prices/
price ceilings/price caps per type of service. These ceilings are reviewed every five years as
a result of a performance evaluation process for each company. The CRE also verifies the
fulfilment of the goals set in the business plan which are submitted to CRE at the beginning
of every five-year term.
Although the CNA has no direct price setting power, it suggests to Congress every year
the fees for the use or exploitation of national waters and their utilities, taking into account
suggestions made by States, municipalities and users.
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In the telecommunications sector, competitive carriers set the prices of their services,
but in some specific cases, COFETEL is empowered to intervene. As established in the
concession title of Telmex, the incumbent carrier, the agency has to authorize its retail
pricing schemes and to set specific price caps every four years. This started in 1998. Before,
the concession title ruled that until 1996 Telmex would have the freedom to automatically
raise tariffs by an amount equal to the increase in consumer prices. In 1997 and 1998, the
basket as a whole could be increased by three percentage points less than the inflation in
the retail price index.42 The provision that a telecommunications operator declared by CFC
as an agent with substantial power in a relevant market, leads in theory COFETEL to
impose specific asymmetric obligations on such a carrier regarding tariffs, quality of
services and information, but it was reversed given the judicial hurdles. In addition to the
sectoral regulators, the PROFECO exerts an economy-wide function of price surveillance for
the goods covered by Article 28 of the Constitution.
The rule-making power of the agencies is relatively extensive, in particular because
the Mexican hierarchy of rules is not clearly defined for all the legal instruments below the
law.43 Regulatory agencies are sometimes unnecessarily exposed to the public debate,
as they do not have the political authority for certain types of decisions. The fiscal power
of the CNA is also relatively unusual for a regulator. It corresponds more closely to a
ministerial remit (see CNA discussion in section Horizontal design).
A wide range of powers is exercised together with the supervising Ministry, or are
advisory powers to the Ministry:
●
Granting licences (COFETEL, give advice on granting and revoking licenses and permits;
CNBV advices to the Ministry of Finance on issuance of major banking licenses).
●
Price setting (CRE participates in the price setting of electricity.
●
Technical advice to the Ministry (all agencies).
These shared powers raise a number of difficulties. In the case of telecommunications
licences, they generate a problem of “double-window”,44 as operators may not always
know who will be the contact person during the administrative process. Notwithstanding,
the application is currently filed only before the SCT. This may also result in unnecessary
delays, when for example the Ministry of Finance is supposed to give an authorisation but
has to wait for formal advice from the CNBV. Nor is this process transparent, as it does not
allow the regulatory agencies to make their views public, which would reduce the
discretionary uncertainty in decision-making.
In the financial sector, the power to release and revoke authorisations is shared by
the CNBV and the Ministry of Finance (SHCP). SHCP grants and revokes operation
authorisations to financial intermediaries, except for credit unions and collective
investment schemes which are authorised directly by the CNBV. The agency also grants
and revokes banking licenses. The relations appear slightly unclear, with some overlap in
the respective functions/tasks. The SHCP has proposed that all powers to authorise and
revoke licences should be conferred on the Ministry, while the CNBV should retain all the
powers that are in between in order to avoid any risks of conflict of interests. However,
unless the opinion of the CNBV is made public in this process, this will remain insufficient
to foster transparency.
The CNA has a safety and technical function: it sets standards on hydraulic waters,
manages and has custody over the national waters in Mexico, under the 1992 Water Law.
However, these powers are defined loosely and are related to various objectives. Some may
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overlap, such as the powers to issue regulations and to verify compliance, or even may be
in conflict (see section Horizontal design). The CNA also has an administrative enforcement
function in granting and revoking water concessions and discharging permits. This was
discussed in the OECD (1998) environmental review, with some concern over the quality of
the enforcement function. However, the environmental review (2003) recognised that
“Mexico now has a record of all water concessions and discharge permits” in the CNA’s
Public Register of Water Rights, which represents a significant improvement in terms of the
agency’s enforcement capacity.
The powers of the Mexican authorities in an international perspective
In the absence of a fully-agreed framework for analysing regulatory powers across
countries, some evidence can be obtained from existing OECD work, mainly in the fields of
telecommunications and electricity.
In the telecommunications sector, the Mexican agency has limited powers in terms of
licensing, as it only provides advice to the SCT, but has fairly comparable powers, in
relation to other OECD countries, in relation to interconnection and service quality [see
OECD 1999, DSTI/ICCP/MSP(99)15/Final. Given the horizontal nature of competition law
enforcement in Mexico, the regulator does not have any role in approving mergers, which
is similar to Spain but differs from the situation observed in the United Kingdom or the
United States. The regulator has the power to settle disputes on interconnection issues and
interpretation of regulatory criteria. Another important difference with other countries
remains in the division of tasks/labour between the competition authority and the
telecommunications agency. In Australia, for example, the competition authority exerts
most of its regulatory powers from an economic perspective. However, the model chosen in
Mexico with a sequential relationship between market power determinations, and sector
specific regulations has up to now revealed certain deficiencies in terms of coordination.
Annex G presents an overview of the main functions of the independent regulators in
the Electricity Supply Industry. It generally reflects the more advanced situation of other
countries in terms of electricity and gas reforms. In many European countries, the opening
of the electricity supply industry has preceded the opening of the gas markets. The timing
of reforms differs in Mexico, with reforms that are more advanced for gas than for
electricity. As a result, the powers of the CRE reflect those observed in other countries for
the gas industry, while they remain limited for electricity. Key elements that would be
necessary for an electricity market are missing, such as the power to oversee third party
access to the grid. The end-user tariffs are regulated by the Ministry of Finance (For more
detail on electricity, see Chapter 5). The opening of the gas market for exports and imports
has exposed the Mexican domestic market to the competitive pressures of the US market,
and the prices of the South of the United States are used as a benchmark by the regulator.
Some of the powers attributed to the regulator in other countries fall under the
responsibility of the main public electricity producer, CFE, such as issuing certain
standards or giving access to the grid. However, as the CFE is limited in terms of energy
production, it also has an incentive to stimulate complementary competitive supply by
additional suppliers.
In the field of financial services, Annex H provides information on banking and
financial supervision. The situation is very complex, given the shared nature of powers in
many countries. Mexico is not unique in distributing the powers across a range of actors.
However, the highly fragmented nature of its regulators, combined with the weak nature of
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the CNBV by international standards, makes the situation even more difficult to analyse. In
a number of countries with a strong regulatory agency, the regulator is usually given the
power to oversee, grant or withdraw licenses.
Adapting the distribution of specific powers in relation to the institutional
environment
This section focuses on the powers of the regulatory agencies (Organismos reguladores) in
relation to the overall Mexican context.
Supervisory powers, sanctions
The supervisory powers include powers to monitor the regulated industry, to sanction
it in case of non-compliance and to enforce sanctions. While the agencies in the study
enjoy a power of sanctioning, it is not clear whether this is sufficiently used as a deterrent,
and whether the size of the financial sanctions is enough to change the incentives and
deter any fraud.
For some of these agencies, supervisory powers are lacking supervisory authority. For
example, under the present status, COFETEL is in charge of overseeing the market players’
compliance with terms and conditions of the concession/license/permit. However,
COFETEL does not have powers to seize information directly from companies. This
weakens the regulator in a way that its significant human and technical resources cannot
compensate. As a result, COFETEL is currently more of a deconcentrated consultative
technical department of the Ministry, than an independent regulator as such. It cannot
impose sanctions on companies violating norms, but can only propose sanctions to the
Ministry. The communications and transport ministry, SCT, has recently presented a
proposal to modify and clarify the relationship between SCT and COFETEL, and also to
enhance COFETEL’s powers (see Box 4.5).
In the financial sector, the CNBV is granted significant powers of investigation and
supervision. It can supervise the implementation of regulations issued by the Ministry of
Finance (Secretaría de Hacienda y Crédito Público), impose administrative sanctions and
suspend operations. It performs direct inspections on site, which is the only example in
Mexico of an agency empowered with such rights. The investigative power, however, is not
extended to criminal supervision: this function is carried out by the Ministry of Finance.
In addition, an invisible element of the supervisory network also contributes to its
strength. In spite of some conflicting views, the CNBV and the central Bank share a same
mission, to ensure the prudential safety and the reliability of the Mexican banking system,
which was severely affected in the past. The fact that all banks need to maintain a core
account with the Central bank, and may need its help in case of refinancing, offers a window
of opportunity for the regulatory authorities to join in their efforts and consolidate their
authority, even with large market players. However, the exit of the largest banks from the
Mexican stock market in spring 2004 has prompted the governor of the Central Bank to
express public concern against the Ministry of Finance’s view, due to the lack of information
and supervision for non-listed companies in the financial sector. Nevertheless, financial
institutions supervised by the CNBV have to submit periodical information, whether they are
listed companies or not. For example, the secondary regulations (Circulares) issued by the
CNBV request that the regulated entities submit different kinds of information, including
financial statements, ratings, quality of information, etc.
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One of CRE’s main problems in monitoring compliance of the rules of permit-holder
companies, is that it has no legal instrument to request important information from PEMEX
and CFE. Combined with the effect of the law on civil servants’ administrative responsibility,
this greatly reduces CRE’s powers in practice.
In the case of the CNA, its large and significant powers to enforce law and impose fines
have been reduced both by its lack of capacity to perform this function properly, and by the
underlying conflict of interest intrinsic to the agency, whose core implicit mission is to help
agricultural users. The CNA has an inspection function to ensure the enforcement, with a
four fold increase in the number of inspections in recent years. For the first time in 2002,
one of Mexico’s largest paper industries was closed down for non-compliance.
Quasi judicial powers, resolving disputes
The quasi judicial powers include the powers to hear and resolve any disputes, either
horizontally among operators, or vertically between consumers and operators.
In the telecommunications sector, COFETEL has the power to settle horizontal
disputes between regulated firms on issues of interconnection. CNBV is not empowered to
settle any kind of dispute since the 1999 reform and the creation of CONDUSEF. Firms
operating in the financial market can resolve a dispute in front of an administrative court,
while in the case of disputes between firms and consumers, the National Commission for
the Defence of Users and Financial Services (CONDUSEF) is responsible for protecting the
rights and interests of people who use or hire a financial product or service supplied by
financial institutions. CNA may also mediate in conflicts related to water at the users’
request. However, the hierarchical nature of the agency, with one single head, does not
place it in an ideal situation to perform quasi judicial functions. The CRE also performs
mediation activities and has the power to resolve disputes.
Relations with the PROFECO are usually not well developed. The lack of contact
between the agencies and the consumer side does not contribute to the effective
resolution, by law or by agreement, of conflicts between operators and consumers. Hence,
it does not contribute to build trust between stakeholders, which would be a legitimate
goal of regulation, together with protecting consumers. This is illustrated in the banking
sector, where fairly strong NGOs have emerged outside the regular institutional dialogue.
Rule-making powers
The rule-making power, i.e. the power to lay down general and abstract rules pertaining
to the functioning of a regulated sector/industry, is generally the prerogative of a politically
accountable body such as a Ministry, a government or Congress. However, for pragmatic and
practical reasons, independent regulatory authorities often find themselves in the situation
of issuing technical or subordinate regulation. This is the case for CNA, CNBV, CRE and
COFETEL. For CRE, the regulator informs the Energy Minister on crucial issues. Regulators
often have the expertise and knowledge of a sector, through close auditing and inspections,
to enact pragmatic rules, taking into account technical possibilities.
Maximising the quality of the regulatory power
Independent regulators or autonomous agencies with regulatory powers are key tools
for regulatory reform. The devolution of powers needs to be accompanied with the same
requirements for regulatory quality as those which apply to the general rule-making. These
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requirements are expressed in the 1995 and 1997 OECD recommendations. They can apply to
the regulator itself, as part of an ex post evaluation, or to individual regulations, as part of an
ex ante assessment, which can then be formulated through ex ante regulatory impact analysis
(R.I.A.). In the case of independent regulators, where the amount of pure rule-making
remains limited, regulatory quality can be best expressed through the following
requirements derived from the OECD reference checklist for regulatory decision making:
●
Do the benefits of regulation justify costs?
●
Is the distribution of effects across society transparent?
●
Is the regulation clear, consistent, comprehensible and accessible?
●
Have all interested parties had the opportunity to present their views?
●
How will compliance be achieved?
Access to information
The first two principles require access to significant information, in order to assess the
costs and benefits and the distribution of effects. The power to carry out inquiries and
investigations is key to reach enlightened, appropriate and effective decisions. This
produces a “Hawthorne” effect, i.e., as soon as the threat of exerting the power exists,
regulated entities may be led to adjust their behaviour in a desired way. For example, the
competition authority and CNBV enjoy wide investigative powers, which they can exert on
their own initiative. In some other cases, regulatory agencies enjoy less investigative
powers. For example, in the case of interconnection, COFEFTEL has to wait for a referral
from an affected party. This can slow down their action and deprive them from effective
decision making. Ensuring market contestability requires that new entrants be able to have
easy access to regulators and to any information brought to light by their investigations.
Transparency
Transparency allows stakeholders to understand the regulator’s decision-making
process and helps to strengthen independence. Recent changes introduced by LFPA have
greatly improved the situation of Mexican agencies. They have to notify all relevant parties
before making a regulatory decision, and give them the opportunity to express their
opinion within a stipulated time limit. However, this applies to general rules only and not
to individual decisions.
Transparency helps the regulatory authority to maintain its own internal institutional
independence. Regulators can also improve transparency by making public the issues
brought to their attention in hearings and informal meetings with ministries, businesses
and other affected parties. This generally meets with the private sector’s demand to be
kept informed about what regulators are doing. In theory, transparency increases
legitimacy, and reduces the need for more costly monitoring or litigation costs. However, in
the Mexican context, relative secrecy prevails for the most important matters and in
particular regarding dialogue with either the largest market players or with the line
ministries. As agencies are still subordinated to Ministries, the possibility of opaque and
direct instructions often remains. The advice given by agencies to Ministries is also not
made public, which prevents them from firmly establishing their authority.
Since the set up of IFAI in 2003, this context is likely to change considerably (see
Chapter 2). Any citizen or company will be in a position to request access to individual
information. This will slowly erode the tradition of administrative secrecy and make
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decision making more transparent. However, there is a risk that that some of the most
important information will no longer be transcribed in written form, due to the possibility
of public transmission.
The clarity of decisions
Clarity in decision-making is one of the core requirements for regulatory quality to
make certain technical decisions understandable to users, and to ensure the public support
of the regulators’ actions. This requires a standardised vocabulary, for example to increase
the clarity of sanctions. This difficult task can be achieved through public hearings, and
reports published on a regular basis. Regulators can also develop exchanges with
stakeholders, such as training representatives of consumer or citizens’ associations.
Setting-up well designed web sites will also enable citizens to have rapid access to useful
documents, which is the case of the agencies examined in this report.
The general transparency efforts introduced by the administrative procedure law are
too limited to produce meaningful effects in terms of clarity as such. It is not clear whether
the regulatory authorities provide detailed justifications for their decisions. The fact that
for key issues the power to decide is either shared with the Ministry, or lies only with the
Ministry, means that the risk of political discretion remains very high.
The consistency and predictability of decisions
Predictable decisions are another a key component of regulatory quality to meet the
needs of those bound by regulations. Business and consumers, as well as ministries, need
to be able to predict individual decisions made by a specific agency. This can be ensured in
two ways:
●
Civil law systems involve asking regulators to comply as closely as possible with the
general rules laid down in laws and regulations. In this case, the lack of creativity for the
regulator in making individual decisions ensures the security, predictability and
legitimacy of its authority. However, this approach is not necessarily viable within a
regulatory system bound to rapid technological change.
●
Common law jurisdictions involve referring to past decisions in a new analogous case.
This ensures a consistent approach, through a quasi jurisprudential process. Explaining
how decisions were made, citing specific laws, regulations and legal criteria, referring to
previous decisions and explaining the rationale for new decisions increase the
predictability of the regulator and its corresponding authority.
Mexico belongs to the first category. The laws stipulating the decisions are relatively
vague. In addition, the lack of clear independence, and the possibility of direct ministerial
intervention in key decisions weaken the effort towards consistency and predictability.
However when the agencies have been given significant autonomy, such as for the CRE with
licences, or the CNA with water licences and permits, they are able to establish a relatively
clear framework that is not contested or unduly criticised by users. In other cases, such as in
telecommunications, the level of consistency and predictability remains very low due to a
weak regulatory framework, compounded by judicial uncertainty. An agency’s reputation is
built over time, passing crucial turning points. This process is slower when uncertainty and
inconsistency are evident. Consistency and predictability of the CNBV’s decisions also raise
some concern, mainly because of a lack of justification for individual decisions.
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Due process and consultation with stakeholders
Due process and proper mechanisms for consultations are necessary to generate
confidence and trust, particularly for new entrants, and to stimulate additional
investments in a sector. Transparent criteria for decisions and for decision-making
processes are important elements for new entrants. A possibility is to hold public hearings
to provide information to competitors, and encourage trust. Trust also rests on the respect
of the procedural rights of each participant because the parties concerned are then allowed
to state their arguments and to check that these have been taken into consideration.
The fact that all regulatory agencies such as Organismos deconcentrados or
descentralizados are subject to the new administrative law passed in 2000 has introduced
radical changes to the Mexican situation. For all important matters, all stake-holders
benefit from clear guarantees, with a systematic right of consultation and due process.
This certainly represents a very important asset for Mexico.
However, other guarantees of due process, such as those involved in the litigation
process, do not seem to address the particular needs of efficiency of a modern regulatory
system. The due process guarantees which had been introduced under the amparo system
to protect ordinary citizens against an abuse of power by the government have been used
by powerful incumbents, particularly in the telecommunications’ sector, to slow down the
opening of the market, thereby reducing the level of certainty and due process for all other
market participants.
Dealing with overlapping responsibilities
In some cases, overlapping demands for licensing and prudential requirements may
trigger a heavy and uncoordinated regulatory burden. The risk here is two fold. First, in the
financial sector, the large number of regulators results in 147 monthly requests for
information for every bank, with a high regulatory burden. This could be reduced with
better coordination. In other cases, the regulators may share powers with the Ministry,
which can blur the situation. The second greatest difficulty is when regulatory
responsibilities overlap at the federal and local levels. Regulatory agencies only operate at
the federal level. For certain regulated entities operating at a local level, such as energy
facilities requiring access to LPG, or power generators, or for water-related issues, the lack
of coordination between federal and local authorities can be burdensome.
Assessment of policy implications
Powers delegated to the Mexican agencies have to be considered in the current context
of weak independence. They also involve unclear distribution of responsibilities between
the agencies and their line ministries. In some cases, this also reflects a wide range of
functions, some of which conflicting and which could be reduced with a refocusing of the
agency’s responsibilities, such as for the CNA. In some cases, the rule-making function
could formally be given to the ministries after public advice from the agencies. The
investigative powers of several of the agencies are also too weak to allow them to properly
accomplish their mission. Finally, when agencies are to exert quasi judicial requirements,
in terms of sanctions or resolving disputes, they need to implement the process in a quasijudicial manner, providing for due process and impartial judgement, with different
persons bringing the proceedings and imposing sanctions.
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Box 4.4. Best practice for utility regulation and economic regulators
in the UK and Australia
After reviewing the economic regulators in the UK, the Better Regulation Task Force,
formulated 5 recommendations:1
1. Regulators’ annual business plans should include a clear prioritisation of their different
objectives, and should explain how the decisions relate to the objectives.
2. Regulators are required to produce assessments of costs and benefits for proposals with
a significant business impact.
3. The boards of regulators should include both executive and non executive members,
and be appointed for expertise rather than represent stakeholder groups.
4. Regulators need to promote consultation.
5. Regulators should set a programme to review market sectors for lifting price controls
and removing outdated licence condition.
In Australia, the Office of Water Management has identified 9 principles of best
practice regulation:2 Communication, Consultation, Consistency, Predictability, Flexibility,
Independence, Effectiveness and efficiency, Accountability, Transparency. This needs to be
accompanied by a whole government approach, with a small number of regulatory bodies
and consistency in their approaches. A Governance Task Force was established on
14 November 2002, to review the corporate governance of Commonwealth statutory
authorities and office holders, in order to develop a broad template of governance principles.
1. See Better Regulation Task Force (2001).
2. See Office of Water Regulation (1999).
The level of regulatory quality, in terms of transparency, clarity, consistency and
compliance has significantly increased following the 2000 administrative procedure law,
which applies to all the agencies. Further progress could be made, for example in
increasing the transparency and justification of individual decisions. Another issue is to
clarify the relative roles of the agencies and the ministries, to eliminate the difficulties that
arise from “double windows”. Further progress will however also require increasing the
independence of the agencies, as much remains here under the threat of political direct
intervention. From an OECD perspective, it could be useful to refer to a set of best practices
for utility regulation, as they have been developed in other countries (see Box 4.4).
ASSESSING THE PERFORMANCE OF REGULATORY AUTHORITIES
Towards outcome-oriented performance assessment
Performance assessment is intended to improve regulatory institutions on the basis of
net results and intends to measure whether the action taken by regulators has been
satisfactory and has produced expected outcomes.
A complex task
Assessing the performance of a regulatory institution is difficult. In theory, the
independence of regulatory institutions is justified by their contribution to economic
efficiency and is balanced by accountability requirements. Assessing performance involves
either ex ante or ex post evaluation. Ex ante evaluation is performed through Regulatory
Impact Analysis in the case of rule-making. Ex post evaluation implies reassessing the
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objectives assigned to the regulatory institution to measure how well they were met and if
they still apply.
It is highly recommendable that a Regulatory Impact Analysis45 be performed before
regulatory institutions or independent regulators are set up. In the Mexican context, this
will automatically be the case if the agency is set up by a law, as the process will follow the
administrative procedure law (LFPA). However, all four regulatory institutions examined in
this report were set up before this law was passed.
As a result, ex post evaluation needs to be performed. This involves assessing the
economic and social benefits generated by the regulatory institutions with relevance to the
powers or missions conferred to them, a key element in keeping publicly-funded
institutions accountable. However, this requires a balanced approach; too stringent
assessment could be used as a tool to undermine the independence of regulators and thus
prevent them from fulfilling their objectives. The absence of an assessment could raise
concerns about their legitimacy and truly undermine their influence.
The pillars of performance assessment
This assessment includes the following:
●
Pure financial assessment of the use of budgetary funds; (Prudent use of resources
complying with financial regulations).
●
Legal review of the regulator’s decision and institutional setting; (Compliance with the law,
legal framework).
●
Broader performance assessment (Value for money).
The pure financial assessment is usually undertaken by the national audit office, but may
be performed differently for independent bodies in some countries. The legal review of the
regulator’s decisions and institutional setting also contributes to accountability. The broader
performance assessment itself can be conducted from several angles and may involve:
●
A self assessment, conducted by the supervisory agency itself.
●
An assessment carried out by an executive body, such as a Ministry or the Comptroller
General’s office.
●
An assessment carried out by a national audit office, as a means to report to Congress in
broad terms on the efficiency of its policies.
●
An independent assessment conducted as part of academic research to contribute to the
public debate.
A major precondition for performance assessment is to state the goals clearly, which
are usually laid down by law. In theory, the most effective approach is to give regulators
clear and possibly single goals, for example opening up a sector to competition, or ensuring
safety. However, in practice multiple goals have often been assigned to sectoral regulators.
In Mexico, the goals have been clearly articulated for certain regulators, such as the CRE or
the CNBV, but they remain very broad and unfocused for the CNA, and are slightly
ambiguous for COFETEL. The trade-off between various objectives of equal political
importance, such as preserving national waters, against the social welfare of farmers and
support for agriculture, are inherently political goals, which need to be discussed and
resolved at the political level, and with the appropriate means and actions. These goals
cannot be solved within the technical framework of one regulatory agency.
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When multiple objectives cannot be avoided, they could at least be hierarchised by
law. The goals set for the CNA are currently of equal importance. A clear hierarchy of
priorities would improve the evaluation process, and would enhance transparency of the
system, allowing regulators to perform efficiently.
Performance assessment against objective external goals can also be completed by an
assessment of the “internal process” i.e.: whether the supervisory agency has a sound
internal organisation and a good mix of technical skills. This amounts to a standard audit.
Furthermore, speed in decision making, clarity of decisions with the corresponding
underlying reasons, the number of legal challenges or amparos affecting them and the
degree of compliance emerging from those decisions, are also relevant parameters
contributing to the quality and performance of a regulatory agency.
The current practice in Mexico
The respective roles of the National Audit Office, the Ministry of Public
Administration, and the COFEMER
Two institutions with audit functions are in charge of assessing the performance of the
public sector:
●
The National Audit Office (Auditoria Superior de la Federacion):
– The Mexican National Audit Office (ASF) is part of the legislative branch and is entitled
to control any institution that is publicly financed. The ASF does conduct performance
assessments for public agencies. However, these are not publicly released on its
website. It is not clear therefore whether any assessments of the regulatory agencies
have been made.
●
The Ministry of Public Administration (Secretaria de la Funcion Publica), with the
General Comptroller (Controlaria):
– The Ministry of Public Administration is the comptroller office for the executive
branch. As such, it has an internal controller in all the public agencies, including the
regulatory authorities. The Organic Law of the Public Administration allows the
ministry to designate external auditors of state entities, and to control and assess
their action. As part of this responsibility, the Ministry of Public Administration has
recently developed a pilot project to assess the performance of a number of public
agencies, including one regulatory authority, the CRE.
This project is carried out by an independent auditing company46 which analyses the
objectives of the deconcentrated authority, its mission as well as the translation of the
objectives into strategic indicators. The internal structure of the agency is analysed as
well as of the capacity of the public officials in charge of developing the internal
control, with also the quality of the sources of information produced by the agency.
This also involves practical recommendations for improvement.
In addition to the institutions in charge of auditing, COFEMER also has a broad regulatory
responsibility, which covers the deconcentrated agencies. The Commission has engaged in
strategic thinking about modernising the framework for regulatory agencies in Mexico, which
was one of the recommendations of the 1999 review. As such, it has performed an analysis of
the 1993 law creating the CRE. This assessment by COFEMER shows that the CRE, in a large
part, can only approve what regulated entities (PEMEX, CFE, LFC) submit. The law on the Public
Electricity Service, also limits the CRE’s functions similarly. The CRE law, together with the
elements of the Reglamento de Gas Natural, on natural gas, and the Law on the Public Electricity
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Service, may generate multiple objectives for the agency, which could sometimes enter in
conflict, such as extending coverage versus efficiency or competition, or interests of the users.
The COFEMER also commissioned a broad legal study of the regulatory framework, which
involves both the hierarchy of rules and the regulatory authorities (Campos et al., 2002). This
assessment has been instrumental in developing the analytical approach in the current report.
The self-assessment by regulatory authorities and the assessment by the line
ministries
Several Mexican regulatory authorities publish annual or even quarterly reports. The
CNA releases an annual report; the CRE releases monthly statistics and information, as
well as an annual report. The COFETEL publishes a quarterly Telecommunications Index
(ITEL) to describe performance in all telecommunications services in Mexico, and has
also released annual reports but on an infrequent basis.47 Although the CNBV releases
significant information, it is not clear whether it regularly produces its annual report.
In addition to the self-assessment, line ministries assess the performance of their
related regulatory agencies. However, the deconcentrated agencies in Mexico are still
currently part of the Ministries, which makes it difficult for them to perform any “external”
assessment. Some of the agencies now concentrate a significant part of the technical and
human resources. As a result, Ministries often have to rely on the agencies for technical
matters as is the case of telecommunications, where COFETEL employs 498 qualified staff.
Independent academic assessment
Independent academic assessment can also greatly contribute to the assessment of
regulatory authorities. A number of studies exist in Mexico relating to the various sectors
(see Bibliography). However, there is a distinction between a “sectoral” evaluation, and the
assessment of regulatory agencies as such. Regulatory agencies are defined by law and
sub-regulations and have to act in the original legal framework. Many of the deficiencies
illustrated in these studies, and some of the shortcomings identified in this report, may not
reflect the direct performance of the regulatory authorities, but rather the limits imposed
on their actions and independence. A culture of systematic assessment, which would be
publicly released and communicated openly to Congress, is still missing.
Assessment of policy implications
Performance assessment still needs to be further developed in Mexico, together with
the requirements for regular and comprehensive flows of information on each of the
examined sectors. Mexico has recently made significant progress in increasing the
transparency of its legal framework and access to information. Providing systematic and
comparative market information should also be part of the regulators’ framework. While
the CNA and the CRE tend to provide significant market information, further steps there
could be taken in the telecommunications sector and financial services. Given the
fragmented nature of the regulatory framework for financial services, this might require a
coordinated effort among the regulatory authorities in the sector.
Information to be collected in the future could also include indicators which are not
covered by the existing framework for general rules. This could involve assessing the time
needed to hand down decisions in individual cases for licenses and permits, and should be
recorded consistently across agencies.
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CONCLUSION AND RECOMMENDATIONS FOR ACTION
General assessment
The Mexican regulatory agencies examined here are facing major challenges. This
reflects the current evolution of Mexican governing practices and the rapid pace of change
of the Mexican economy. They are still embedded in a political and administrative tradition
which has deprived them of the authority and powers necessary to fulfil their mission. In
spite of a mixed framework, some of these agencies have been able to achieve significant
progress. The Mexican financial system has reached a sound and more balanced position.
The regulatory framework for water has significantly improved, with a clear registration of
permits, and an increase in recovering the costs of maintenance by the users. Some
competition is now taking place on local, long distance and mobile phone services, but
rates need to decrease further.
These achievements may still appear modest in the light of the existing potential in
Mexico, and the unmet needs of a large and growing population. The ability of the system
to adapt is also impaired by some of the rigidities of the current legal framework. Even if
the Mexican regulatory agencies have attained a high level of expertise, and are complying
with strong formal requirements for public consultation and transparency, the level of
social consensus, the understanding of the potential and also the limits of regulation
remain insufficiently developed. These regulatory agencies have to be reformed to be able
to play an active role, enforcing regulation as Mexican democracy and policy-making
institutions change.
Several worthy reform proposals exist in the telecommunication and energy sectors
(see Box 4.5), which aim at improving the institutional design within the current
administrative regulatory framework. However, they result from a sectoral approach and
do not seem to have a consistent and systematic perspective on the governance and role of
regulatory agencies. This is a difficult and crucial point, since fundamental elements of the
Mexican regulatory and administrative framework will need to be amended in order to
create a stable and efficient level playing field for regulatory enforcement. The regulatory
agencies need to be given a clear mandate, with sufficient guarantees in terms of
independence, and sufficient powers to accomplish their missions. This needs to be
accompanied with dialogue at the political level and with civil society to ensure legitimacy
and accountability.
This is a difficult challenge, but one that Mexico can and should tackle, since it
concerns a cornerstone of the Mexican regulatory framework, with a significant impact on
the prospects for strong long-term economic growth. The Mexican experience with
transparency and with reforming the framework for electoral oversight shows that, when
the consensus exists, the corresponding institutional arrangements can be put in place.
This study addresses core aspects of the living conditions of all Mexican citizens and
businesses, since water, energy, communication and access to credit are key to daily life and
work. Therefore, a public consensus is needed to support regulatory reforms, strengthening
a participative and inclusive democracy. The process for consulting new regulations has
received significant attention on websites and through electronic channels. However, this
may not be enough to create a domestic consensus on core issues such as water, energy,
communications or financial services. In other OECD countries, democratic debate is often
preceded by a long phase of expert and public discussions, with dedicated task forces
receiving support from a broad electoral spectrum. Creating the conditions for such a
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Box 4.5. Current reform proposals for the COFETEL and in the energy sector
The COFETEL
A new Presidential Decree regulating the Federal Telecommunications Commission of
Mexico (COFETEL) is currently envisaged to increase the legal basis in the sector and to
improve the capacity of the agency. The new Decree is complemented by a Reglamento Interior
for the COFETEL. These legal instruments substitute the original Presidential Decree setting up
COFETEL; provide the COFETEL with a regulatory framework distinct from that of the SCT; and
substitute the former Reglamento Interno issued by the board of COFETEL. The new regulation
involves a precise division of tasks between COFETEL and the line ministry and establishes a
new structure of the agency based on quality processes. COFETEL specifically acquires
new powers, previously in the remit of the Ministry of Communications and Transport,
for exclusively and directly issuing: 1) telecommunications permits; 2) sanctions; and
3) authorizations to expand coverage zones in a license agreement. (Thus adding to the list of
license agreement modifications which COFETEL can directly resolve, without intervention of
the Ministry.) The structure of the agency would shift from one based on divided disciplines to
another one based on integrated processes. At present the administrative structure below the
plenary of the agency is organised to reflect the division between engineering, law and
economic sectors. This involves substantial delays and concentrates all final decisions on the
board itself, thus reducing efficiency. The proposed new structure would reflect a new
organisation, with three substantive units, based on interdisciplinary teams: industry services,
supervision and verification, and prospective and regulation. The board itself will concentrate
on strategic regulatory planning and issue regulation on the basis of the work submitted by the
prospective and regulation department, while the enforcement of rules will be carried out by
the supervision and verification departments and the petitions addressed to the agency would
be resolved by the industry services department. This reform proposed as a Decree would
involve fixed staggered terms for members of the board. This would help to improve the
management of the agency, with a more flexible structure and a more optimal use of human
resources. However, the level of independence would still be attached to that offered by a
Decree, which does not offer the same level of guarantees and powers as a law. However, it is
more difficult to implement changes at the level of the law in Mexico at the moment.
The energy sector and the CRE
The presidential reform currently proposed essentially focuses on the electricity sector
(see corresponding chapter). It involves modifying the constitution if possible, and giving
more management autonomy to the public companies. The reform proposals seek to
extend the scope of private supply by strengthening competitive pressure on the electricity
market. This would involve strengthening the CRE, modifying most of the key laws
governing the electricity sector, including the CRE law (Ley de la Comision Reguladora de
Energia). The electricity public service would remain the direct responsibility of the state.
The system operator currently embedded in the CFE would be established as an
independent state-owned operator. The CRE would set a mechanism to establish the tariffs
jointly with the SHCP. However, the role of CRE in overseeing grid management and
control, and ensuring third party access is not clear from these proposals.
dialogue would lend support to what might otherwise appear as a fairly technocratic,
administrative and technical process. The experience of other countries with utility
regulation, shows that these issues have to be addressed at the highest political level,
particularly when they can affect the lives of all citizens, many of whom remain very
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vulnerable to economic fluctuations and to variations in the price of basic commodities. The
policy recommendations offered below must be brought into the public debate in order to be
understood, implemented and accepted by a broad political and social spectrum.
Policy recommendations
The policy recommendations below follow the analytical framework adopted for this
report and reflect the international experience. Implementation will need to consider
national practices and legal possibilities, since regulatory authorities are contextdependent. Some of the proposed changes may take several years to be implemented. In
addition, some of the changes will require new institutional practices, and full acceptance
by all stakeholders.
1. Strengthen the governance framework of the Mexican regulatory authorities
to ensure independence from direct political intervention and regulated interests.
The status of deconcentrated authorities, as determined by the 1976 Organic Law, is
not adapted to the needs of modern regulatory authorities. (Ley Orgánica de la Administración
Pública Federal of 1976). For example, the law could be revised to create a new status for
independent regulatory authorities. Ideally, this new status would be endorsed at the
constitutional level.
The governance framework adopted for the IFAI or for the CFC could be used as a
model. This would involve creating a board that would have an odd number of members,
(for example between 5 and 11 members), and would oversee/head the regulatory
authorities. The members should be nominated for (staggered) fixed terms of at least five
years. These terms should be non-renewable, or extended not more than once. The
possibility of dismissal should be strictly limited to cases of criminal liability.
The members and chairman of the board should be nominated by the President
following the proposal from the relevant minister. These could be offered to Congress for
approval. The board should not receive instructions from individual ministers. All senior
staff members of the regulatory authorities should be entitled to professional civil service
status. The law on the responsibility of civil servants should be amended in order to remove
personal liability with regard to the financial impact that the decisions may have on the
regulated public entities. The terms for ensuring independence from the regulatees should
be strengthened, introducing restrictions for exercising responsibilities in the regulated
sector for members of the board and senior executives of the regulatory agencies. The
cooling-off period which is currently one year could be significantly extended, possibly for up
to a period of five years. Corresponding guarantees within the civil service should however
be offered to former members of the board in order to ensure their full independence.
The regulatory agencies’ budgetary arrangements should either be the same as those
adopted for the IFAI, with a direct budgetary submission to Parliament, or should be
derived from fees, directly transferred to the entities, following a formula adopted by law.
The elements above need to be reflected in the various laws governing the regulators
so that they have sufficient powers and independence to be more effective in the future.
All decisions taken by the board, whether concerning general rules or individual
enforcement cases should, in future, originate from the regulatory authorities. This will
increase the transparency and predictability of the decisions, contributing to a supportive
environment that fosters investment in core infrastructure.
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2. Establish a balance with a clear framework for accountability and performance
assessment.
Increased independence has to be balanced with a clear framework for accountability.
Effective independence from short-term political interventions requires that regulatory
authorities establish a dialogue with all stakeholders.
In Mexico, the concept of ministerial accountability has hitherto prevailed in public
debate. Regulatory authorities need to establish an open dialogue with both the executive and
legislative branches. The chairmen of the boards of regulatory agencies should be allowed to
attend Parliamentary hearings, with the possibility of coming every year to introduce their
annual report directly to Congress. They should similarly be invited to present their annual
report to their line minister and to the President in a formal public hearing.
In addition, regulatory agencies should also improve their accountability and legitimacy
towards the public by encouraging dialogue with the public, NGOs, consumers’ associations
and ordinary citizens. This should also be done at the local level for issues that are key to the
future of local economic areas, such as water, energy or telecommunications. Regulators
should similarly be encouraged to have an active communication strategy with the media, to
make sure that their case and arguments are well understood and received.
Performance assessment is also an important instrument in keeping regulatory
agencies accountable for their actions. Early efforts in Mexico should be expanded and
applied to all regulatory agencies. International comparisons with countries facing similar
challenges could also be used in this process. Regulatory agencies should also be made
accountable for producing the information that is necessary to analyse and understand
trends in the regulated sectors on a regular and comparable basis.
3. Consolidate the powers of the regulatory agencies, increasing their investigative
capacities while offering guarantees for due process to interested parties.
Regulatory authorities need sufficient powers to accomplish their missions.
Regulatory authorities should be given the authority to grant licences and permits on
most usual cases. When the decision is left to Ministers, for example for major banking or
telecommunications licences, this should be done after receiving public advice from the
regulator. The agencies could be given the right to establish ex ante price setting in the case
of significant market power, or public or private monopolies. In the future, the CRE should
be given full authority in the pricing process for electricity.
All authorities should be offered the possibility to carry out investigations, holding
similar investigative powers to those currently enjoyed by the CNBV and to some extent
the CRE. They should be able to impose sanctions, such as withdrawing licenses, or impose
fines for non-compliance. The regulatory authorities, in preparing and announcing
sanctions for misconduct or lack of compliance with regulatory requirements, should offer
guarantees of due process to the regulated parties.
4. Clarify the distribution of powers and tasks with the line ministries.
Joint powers shared between the agencies and ministries should be suppressed,
particularly with regards to the COFETEL and the CNBV. This should prevent any “double
window” and would streamline the procedures as well as clarify the regulatory framework.
Where regulator is to play an advisory role, Ministers should be required to obtain public
advice from the regulator before making a decision.
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5. Clarify the functions and focus of the CNA as a federal watchdog for national waters.
The findings of this report highlight the ambiguous mission of the CNA. This needs to
be clarified, with a better focus, leaving aside the technical support function, and the general
policy-making and planning to the line Ministry. The current technical support function,
inherited from the historical legacy, could be transferred back to a ministry and/or to the
States at local level. The overall planning and strategic policy-making functions, defining the
broad future of Mexico’s use and orientation with regards to water should also be a
Ministerial remit, and should be thus handled. Finally, the current fiscal function of the CNA
should be transferred back either to the Environment Ministry, or to the Ministry of
Finance (SHCP).
This may call for other options to support Mexican agriculture, and particularly its
poor farmers. This could involve a contractual alliance between the federal government
and the states, with partnerships included at the local level, and with river basin councils.
This should help to establish a clear focus for the CNA’s mission, as a watchdog for
national waters, in charge of environmental and safety matters, with a strong scientific and
technical base. The CNA should report to Parliament on an annual basis on the preservation of
national waters and the possibilities for all users to pay for the opportunity cost of the natural
resource that they use. The CNA should be given a clear leadership at the national level, while
forging partnerships with the water commissions established at the level of the various states.
6. Strengthen competition in the electricity, telecommunications and financial sectors
through implementing systematic agreements and cooperation with the Competition
Authority (CFC).
The report highlighted that opportunities for competition could be strengthened in
several sectors. In the electricity sector, allowing major end users to choose their suppliers
would strengthen competition. However, this needs to be accompanied by a deep
restructuring of the whole electricity sector (see Chapter 5).
All sectoral regulatory agencies should have clear collaborative agreements with the
competition authority (CFC). They should consult the CFC systematically, receiving its
advice publicly.
The CNBV should be more sensitive to the need of improving the efficiency of the
financial sector. This may involve lower financial margins and a better response to users’
needs, while keeping the prudential perspective. The CNBV should systematically consult
CONDUSEF and should make more frequent contact with users’ associations. The legal
framework should be further clarified to better define the rights of the investors and lenders,
by enforcing clear guarantees and duties. The CNBV, the Ministry of Finance and the
Competition Authority (CFC) should work in collaboration to encourage competition amongst
all players on financial markets, such as non-bank banks and mortgage institutions.
7. Improve the coordination mechanisms amongst regulatory agencies
in the financial sector.
Regulators in the financial sector should improve their coordination and streamline their
procedures in order to reduce the administrative burdens imposed on the financial system.
Opportunities for systematic consultation and information-sharing amongst agencies should
be systematically created. In the future, a more rational institutional framework could also be
envisaged, as long as this would equally respect the strategic interests of all market players.
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8. Stimulate the emergence of strong consumer associations. This will strengthen
the involvement of NGOs in the process through partnerships and technical
assistance with PROFECO and CONDUSEF, and increase the legal and practical
possibilities for challenging powerful incumbents and firms.
The Mexican regulators have had comparatively less contact with consumers’
associations than in other OECD Countries, partly because these groups are relatively less
developed in Mexico. Public authorities, PROFECO and CONDUSEF could provide technical
support and financial help in order to build stronger consumers’ groups. The possibilities
for these groups to legally challenge powerful incumbents or market players in key sectors
such as telecommunications or financial services should also be expanded.
9. Strengthen the legal departments of the regulatory agencies.
The Mexican regulatory agencies have often seen their powers limited in practice by
excessive recourse to amparos. It should be a priority for all agencies to build strong legal
departments, similar to the one currently established at the CNA. The economic cost of
these amparos is far greater than the budgetary resources that would be involved in
strengthening the legal departments.
10. Consider constitutional and legal changes to reform the appeal system
and the amparo proceedings, possibly by creating a single appeal body entrusted
with technical expertise for core federal economic regulatory agencies.
Beyond the previous recommendation, Mexican authorities should consider a
fundamental overhaul of the amparo system, which has been diverted from its original
purpose in a number of recent cases. The possibility for an amparo to hold up the execution
of a public decision should be strictly limited to the most necessary cases, and should be
associated with a emergency clause allowing judicial decisions that would intervene
within a delay of no more than two months. This is crucial for key sectors exposed to rapid
technological change, such as the internet or telecommunications.
Mexican authorities should consider establishing a single appeal body, which would
be competent to hear all appeals from the sectoral regulatory authorities and the federal
competition authority. This body should be staffed by professional judges, and by technical
experts in regulatory matters and should be competent in the first and last instance,
except for recourse to the Supreme Court of Justice. Ministerial appeal in the first instance
should be suppressed.
11. Promote public debate underpinning reforms in the water, telecommunication,
energy and financial sectors, to ensure public participation and reach a broad
and supportive social acceptance of reforms.
The Mexican regulatory agencies operate in key sectors of the Mexican economy,
touching core aspects of the lives of all Mexican citizens. Reforms to these sectors and to
the agencies require a significant level of public participation, broad and supportive social
acceptance of reforms, and the collaboration of various constituencies. Other OECD
countries also experience this challenge in reforming core sectors of their economies and
societies, such as Canada with its health care sector and the Romanow Commission, or
Germany and its pension and aging reforms. The example of the Comision Nacional
Hacendaria on fiscal issues in Mexico, and the national debate created to set up the IFAI
could also be taken as examples.
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This is a challenging task, given the strong specific interests that often prevail in
democratic debates, but one that needs to be tackled if Mexico is to address the
fundamental underlying challenges in these sectors. A possibility would be to install senior
task forces that would conduct broad social consultations and foster debate in order to
propose a reform strategy acceptable at all levels.
Notes
1. The structure was applied to the review of supervisory bodies in Norway (OECD 2003) This
analytical framework was also adopted by J.J. Laffont and M.A. Frison Roche (2002) for the French
Independent Administrative Authorities. Some domestic attempts also exist at defining a
conceptual framework to analyse the situation of these agencies. Campos (1998).
2. Majone 2004 report for the OECD.
3. Delgadillo and Lucero mentioned in Campos et al.
4. Interested readers will find additional insights on the competition authority (CFC) in OECD (2004b).
5. See World Development Report (2002) and Doing Business in 2004.
6. See World Bank. Doing Business in 2004. http://rru.worldbank.org/doingbusiness/.
7. Addressed in a number of other OECD reports.
8. As an example of World Bank recommendations, interested readers can refer to Giugale,
Lafourcade and Nguyen (2001) which covers all the areas of the study.
9. See Del Villar, Garcia Verdu and Murillo (2004), Reform Statelmate in Mexico: What is the Way Out?
10. For example, the Mexican rates for residential and commercial use, according to the composite
basket of annual telephone charges were the highest among OECD Countries, (OECD
Communications Outlook 2003). See also reference in Del Villar Garcia Verdu, Murillo (2003).
11. Del Villar, Garcia Verdu and Murillo (2003) have estimated that adjusting Mexican residential
telecommunication rates to the Canadian level, would result in an increase of consumer surplus
equivalent to 1.7% of household’s total expenditures.
12. See Campos et al. (2002).
13. For more detail on the history, see Reynolds 1995.
14. P. Garcia Alba 2003, experiencia Mexicana en Regulacion y Competencia Bancarias.
15. See Gruben Mc Comb 2003 for an analysis of the “supercompetitive conditions” in the market
before the crisis.
16. See OECD 2003, special chapter on banking.
17. Operating expenses are higher only in Turkey and the Czech Republic.
18. See Capital Markets and Legal Institutions, by Rafael La Porta and Florencio Lopez de Silanes.
19. PNUMA (1998), supplemented by (OECD Environmental Compendium, forthcoming).
20. In this dry area, institutional and physical geographical boundaries do not match. This has led to
a number of academic studies (Bennett Herzog 2000, Blatter Ingram 2000, Saldana 2003,
Fernandez 2002) but will not be discussed here as the CNA is not involved.
21. The buyers involved a majority holding Mexican Conglomerate, Grupo Carso, owned by Carlos
Slim, and foreign investors. Later on, Grupo Carso reinforced its control over the company.
22. The Purchasing Power Parity (PPP) adjustment helps to adjust for price and income differentials
across countries, and involves a complex statistical methodology. The data presented results from
a common basket of services to allow for comparison across OECD countries.
23. The enactment of these rules was in fact recommended in the 1999 Regulatory Reform Report and
was in the process of revision with COFEMER, as part of the LFPA framework, when this report was
prepared.
24. See DAFFE/CLP/WP2/WD(2000)5 for a synthetic presentation.
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25. It is even in discussion in Italy where some of these responsibilities are split between the Central
Bank for bank supervision, and the CONSOB for financial markets. The project would transfer the
responsibility to an independent authority.
26. See Schneider in Maxfield, Schneider (1997).
27. See Chapter on Government Capacity to Ensure High Quality Regulation.
28. This formula has been criticized for unduly limiting the effect of court judgements in interpreting
and enforcing the Constitution. Current projects exist in the Mexican senate to change this
limiting effect and allow the effect of the court judgement to apply to the whole population.
29. A definition in Spanish: el juez no resolvió el conflicto de fondo, ni se pronunció respecto a la
constitucionalidad o inconstitucionalidad de las leyes o los actos reclamados.
30. Ley Federal de responsabilidades de los servidores publicos.
31. Ley Federal de responsabilidades administrativas de los servidores publicos.
32. Ley Federal del Servicio Profesional de Carrera.
33. As mentioned in OECD (1998) Environmental review.
34. Direccion General de Radio, Television y Cinematografia, as an “Organo Regulador” for the electronic
communication medias and the movie industry, as part of the Secretaria de Gobernacion.
35. The CNBV has also some responsibility and is involved in supervising and regulating the following
financial institutions: holding companies of financial groups, stock exchanges, general deposit
warehouses, credit unions, financial leasing companies, financial factoring companies, saving and
loans firms, foreign exchange firms, limited scope financial companies (non bank banks or
SOFOLES), clearing houses.
36. See OECD (2003), EDRC survey.
37. The E-Mexico The E-Mexico national system intends to provide community Internet access to
10 000 Digital Community Centres (CCDs) located in schools, libraries and others public places. Up
to December 2003, 3 200 CCDs are in operation providing community Internet access to all
Municipalities in the Country via satellite E-Mexico will start by Q2/2003 two bidding processes for
two additional satellite networks to start another 4 000 CCDs, mainly in rural areas. Additional
connectivity will be started by the end of 2003 to provide terrestrial connectivity to reach the
committed 10 000 CCDs by the end of the current presidential administration. In addition, the
government has set aside a social coverage fund (FCST) of around 75 m USD, approved by Congress,
to foster coverage of telephone service in rural areas and urban non served areas, to be used
through a bidding process soliciting the help of the private sector to develop wire and wireless
networks, including Internet connexion services. As many of the users deprived of access are in
poor and remote areas, wireless (including satellite technology) might appear as a way to
“leapfrog” the absence of a well developed wire-network covering the country. The FCST will
provide service mostly in homes (about 70% of the new services) but also allowing for pay phones
in streets and public places.
38. For more detail, see the results of the OECD (2000) roundtable discussion organised under the
auspices of the Competition Committee. See also (OECD 2004b), recent review of competition
policy in Mexico.
39. Competition legislation considers that both cross subsidisation and discrimination as relative
monopolistic practices, when they are performed by an agent with substantial market power. However,
it also states that agents can present the argument of efficiency gains to defend these practices.
40. See OECD (1999), Report on regulatory reform in Mexico.
41. A team of four staff for the whole energy sector.
42. In the 1998-2002 period, the prices of the controlled services basked was reduced 18% in real
terms. In the period 2003-2006, the price cap authorisation should ensure a decline of at least 12%
in real terms.
43. See Campos et al. 2003, for a discussion.
44. “Double Ventanilla” in Spanish.
45. Manifestacion de Impact Regulatorio (MIR).
46. Academia Mexicana de Auditoria Integral y Desempeno.
47. No annual reports exist after 2002.
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OECD (2001), Insurance Regulation and Supervision in Asia and Latin America, Paris.
OECD (2002), Economic Survey Mexico, Paris.
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Quintyn, M. and Taylor, M. (2002), Regulatory and Supervisory Independence and Financial Stability,
Internacional Monetary Fund, Working Paper.
Ramirez, M.D. (2001), The Mexican regulatory experience in the airline, banking and telecommunications sector.
Reynolds, Clark W. (1996), “Efficiency, Control, and Convergence: Lessons from Privatization of the
Mexican Banking System”, in Quaderni di Economia e Finanza, 5:3, pp. 31-69.
Tovar Landa, Ramiro (2002), Eficiencia en la Regulación Financiera y Reforma de las Autoridades de
Supervisión: Un panorama de los Países de la Cuenca del Pacífico (APEC), Mexico, D.F., ITAM, Centro de
Estudios de Derecho Privado, Documento de Trabajo.
von Furstenberg, George M. (1997), Regulation and supervision of financial institutions in the NAFTA
countries and beyond, Boston; Dordrecht and London; Kluwer Academic.
Wallison, Peter J. (2003), Policy Changes and Events Affecting the Financial Services Sector in the United States,
Mexico, D.F., Workshop COFECO-APEC on Regulation and Competition in the Financial Services
Sector, 17 November.
Williams, M.E. (2001), “Learning the limits of Power: Privatization and State-Labor Interactions in
Mexico”, in Latin American Politics and Society, winter.
World Bank (2001), World Development Report 2002: Building Institutions for Markets, Washington, DC.
Telecommunications
Casasús, Carlos (1992), Privatization of Telecommunications: The Case of Mexico, mimeo.
Galal, Ahmed and Shirley, Mary (eds.) (1994), Does privatization deliver? Highlights from a World Bank
Conference, Washington, DC, World Bank, EDI Development Studies.
Gonzalez, Adrian E., Gupta, Amar and Deshpande, Sawan (1998), “Telecommunications in Mexico”, in
Telecommunications Policy, 22:4-5, pp. 341-357.
Heston, Alan and Lipsey, Robert E. (eds.) (1999), International and Interarea Comparisons of Income, Output,
and Prices, Chicago and London, The University of Chicago Press.
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Horwitz, Robert (2000), “La desregulación como proceso político”, in Gestión y Política Pública, 9:1,
pp. 137-148.
Katz, Harry C. (ed.) (1997), Telecommunications: Restructuring Work and Employment Relations Worldwide,
Ithaca and London; Cornell University Press, ILR Press.
Landa, Ramiro Tovar (1997), “Policy Reform in Networks Infrastructure; The Case of Mexico”, in
Telecommunications Policy, 21:8, pp. 721-732.
Mariscal Avilés, Judith (2000), Telecomunicaciones en el TLCAN: una Oportunidad Perdida, Mexico, D.F., CIDE
– Centro de Investigación y Docencia Económicas, Working Paper, No. 86.
Mariscal, Judith (2002), Unfinished Business. Telecommunications Reform in Mexico, Westport (Connecticut)
and London, Praeger.
Noam, Eli M. (ed.) (1998), Telecommunications in Latin America, New York and Oxford; Oxford University
Press, Columbia Institute for Tele-Information Global Communications series.
OECD (1999) (see DSTI/ICCP/TISP(99)15/Final), “Telecommunications regulations: institutional
structures and responsibilities”, Paris.
OECD (2001), Access pricing (with a focus on telecommunications). Mexico, Paris, DAFFE/CLP/WP2/WD(2001)33.
OECD (2003), Communications Outlook, Paris.
Ruiz Sacristan, Carlos (1999), “Comunicaciones y transportes: Sector estratégico para una política de
Estado”, in Comercio Exteriór, 49:4, pp. 347-354.
Singh, J.P. (1999), Leapfrogging Development? The Political Economy of Telecommunications Restructuring,
Albany, State University of New York Press, SUNY Series in Global Politics.
Tovar Landa, Ramiro (1996), “Competencia, Interconexión y Redes Dominantes”, in Economía Mexicana
Nueva Época, 5:2, pp. 249-284.
Tovar Landa, Ramiro (2003), Política de Competencia y Regulación en el Sector Telecomunicaciones en México:
TELMEX como Operador Dominante y la Efectividad de una Regulación Errante, Mexico, D.F., paper presented
at the Seminar on Regulation and Competition in the Telecommunications Sector, September.
Vogelsang, Ingo (2003), “Price Regulation of Access to Telecommunications Networks”, in Journal of
Economic Literature, XLI, pp. 830-862.
Yépez García, Rigoberto Ariel (2003), Política Regulatoria en la Venta y Distribución de Gas Licuado en México,
Mexico, D.F., paper presented at the Seminar on Regulation and Competition in the
Telecommunications Sector, September 2003.
Water
Anwandter, Lars and Ozuna, Teofilo, Jr. (2002), “Can Public Sector Reforms Improve the Efficiency of
Public Water Utilities?”, in Environment and Development Economics, 7:4, pp. 687-700.
Ascher, William (1999), Why Governments Waste Natural Resources: Policy Failures in Developing Countries,
Baltimore and London; Johns Hopkins University Press.
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Washington, DC, Inter-American Development Bank, distributed by Johns Hopkins University
Press, Baltimore.
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Institutional Change: A Commentary”, in Natural Resources Journal, 40:4, pp. 973-988.
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Water Resources”, in Natural Resources Journal, 40:2, pp. 439-473.
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Dasgupta, Susmita (1997), What Improves Environmental Performance? Evidence from Mexican Industry,
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Mexico”, in Journal of Economic Behavior and Organization, Vol. 42, pp. 19-41.
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University Press for the World Bank.
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for the Water Supply and Sanitation Sector in Mexico”, in Journal of Environmental Planning and
Management, 44:4, pp. 525-544.
Downs, Timothy J. et al. (2000), “Sustainability of Least Cost Policies for Meeting Mexico City’s Future
Water Demand”, in Water Resources Research, 36:8, pp. 2321-2339.
Easter, K. William, Rosegrant, Mark W. and Dinar, Ariel (eds.) (1998), Markets for Water: Potential and
Performance, Boston, Dordrecht and London; Kluwer Academic.
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Environment and Development Economics, 7:4, pp. 715-732.
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Cheltenham, UK and Northampton, Mass., Edward Elgar.
Haggarty, Luke, Brook, Penelope and Zuluaga, Ana María (2001), Thirst for Reform? Private Sector
Participation in Providing Mexico City’s Water Supply, Washington, DC, World Bank, Policy Research
Working Paper, No. 2654.
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Lessons from Case Studies”, in Environment and Development Economics, 7:4, pp. 625-641.
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Options, Washington, DC, World Bank, Directions in Development Series.
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Salman, Salman M.A. (1997), The Legal Framework for Water Users’ Associations: A Comparative Study,
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Regulación.
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World Bank.
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OECD Reviews of Regulatory Reform: Mexico
Progress in Implementing Regulatory Reform
© OECD 2004
Chapter 5
Electricity
This chapter analyses the current regulatory framework in the electricity sector.
While noting the accomplishments that have been made, the chapter calls for
significant changes. This should help to improve efficiency, secure adequate future
investment, reduce the investment burden on public finances, and generally support
the future competitiveness of the Mexican economy.
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Introduction
Mexico is engaged in a major debate over its electricity sector and the reforms that
should shape the sector’s future. The purpose of this report is to assess the reform
proposals and advise on the best way forward. The report takes into account the sector’s
recent evolution, its future prospects, the current regulatory and governance framework
and the general macroeconomic, social and public sector context facing Mexico today.
Mexico is a federal State, made up of 31 states and Mexico City, a Federal District. It is
a large country (four times the size of France) and very geographically diverse, with a
generally hot and dry climate. It is geographically linked to North America as well as Latin
America (it has frontiers with Guatemala and Belize). It has very close connections with the
US via the North American Free Trade Agreement (NAFTA), and emigration. Energy
resources are significant.1 Its energy links are mainly with US: oil exports, gas imports, and
a few electricity interconnections. There is a longstanding tradition of energy as a State
prerogative, with the 1938 expropriation of oil assets from the UK and US. Electricity was
added to oil and gas in the Constitution as a State prerogative in the 1960s.
The report argues that Mexico needs to make significant changes to its current
regulatory and governance arrangements for the electricity sector, in order to improve
efficiency, secure adequate future investment, reduce the investment burden on public
finances, and generally support the future competitiveness of the Mexican economy. Many
in Mexico agree with the definition of these needs and objectives, but it is proving very
difficult to establish a consensus on what to do exactly, and how far to go, and some strong
opposition to reform exists. A difficult debate centres on whether, and if so how far, to
introduce direct competition to the two State incumbents, which would involve major
changes to the current market and regulatory framework and crucially, Constitutional
amendments to make direct competition possible.
The best long term prospects lie in the development of a competitive market. Well
conceived, this would not only attract investment but also generate sustained pressures for
efficiency. The 1992 changes allowed the limited involvement of private generators into the
market through specific schemes, but not in direct competition with the incumbents.
Unusually in today’s OECD context, Mexico does not yet have a competitive market in
which buyers and sellers of power may interact directly, and consumers do not have a
choice of supplier. If direct competition is to be introduced however, it is best to avoid
limited change and develop a strong plan that involves, for example, effective separation of
system operation from other activities.
Whether or not direct competition is introduced now, two issues need urgent action.
First, the legal uncertainty which overhangs the current limited scope for private generation
needs to be resolved. Given demand growth projections, Mexico cannot afford any
uncertainty over whether private generators may enter the market. Second, the capacity for
strong and independent regulation needs to be reinforced, and at the same time the
governance and financial structures for the State incumbents need radical overhaul, to
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ELECTRICITY
reduce costs, promote efficiency and ensure adequate investment in the grid. Strong
regulation and governance changes must go hand-in-hand though, as they are mutually
reinforcing and there is a serious danger that governance changes to strengthen the
incumbents without also strengthening regulatory oversight would backfire. Giving the
incumbents greater freedom to manage their affairs cannot be envisaged without putting in
place the regulatory capacity to ensure that these freedoms are exercised responsibly.
History and general context
History of the electricity sector
The history of the Mexican electricity sector can be divided into three phases: the period
prior to the 1960 Constitutional amendment excluding private participation in the electricity
sector, the period between 1960 and 1990 in which this approach was consolidated, and 1990
to the present day which has been marked by efforts at market opening and reform.
The 1960 Constitutional amendment is therefore a relatively recent development in the
history of Mexico’s electricity sector, and electricity has not always been considered a natural
resource in the same terms as primary energy, an issue that is worth underlining in the
context of the current debate on reform.
Before 1960: public utility character but coexistence of private and public providers
Though electricity has long been considered to have a public utility character, the
coexistence of private and public provision has also been longstanding, going back to the
electricification policies of President Porfirio Díaz in the 19th century. However these early
policies were short on incentives to encourage rural electrification and promoted largely
urban-based investment led by US, Canadian and European-based companies.
The first legal instrument for electricity was the 1926 Electricity Code (Codigo
Eléctrico) which underlined its public utility character, and the exclusive jurisdiction of the
Federal authorities in the regulation and oversight of electricity generation. This was
followed in 1939 by President Lázaro Cardenas’ Electricity Industry Law (Ley de la Industria
Eléctrica) which confirmed the public utility character of all activities related to the sector,
established the need for regulation of the electricity supply chain from generation and
transportation to end user supply, and set up the first permit and concession system to
regulate electricity activities and expand electrification.
As the 20th century wore on, Mexico’s energy policy increasingly promoted the
principle of national ownership and State responsibility, underscoring the related need to
promote the country’s electrification and move beyond the provision of street lighting in
urban areas, where the main efforts of foreign companies, such as the Canadian Light and
Power Company (precursor to today’s Luz y Fuerza del Centro – LFC) had focused. The
Comisión Federal de Electricidad (CFE) was created in 1937 to promote electrification and
coordinate private efforts to achieve this goal.
The expropriation and nationalisation of oil assets in 1938 from UK and US companies
marked a fundamental turning point, reflecting a growing and deeply held conviction of
the need for State ownership and control of energy as part of the nation’s wealth and
heritage, and a rejection of foreign participation which had its roots in Mexico’s political
and economic development following independence from Spain. There was considerable
popular support for the 1938 expropriation.
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1960-90: Consolidation of State control and public ownership of electricity
Electricity policy – already considered to have a public utility character – assimilated
the principles which were shaping the rest of the energy sector. This led to its being
considered a natural resource – like hydrocarbons – which it was the duty of the State to
control for the benefit of the people. This change was formalised in 1960 under President
López Mateos, with an amendment to Article 27 of the Constitution. The amendment says
that the State has exclusive rights over all the activities related to the provision of
electricity public service (generation, transmission, distribution and supply) though the
Constitution does not offer a specific definition of public service.2 Further legal changes
followed to give effect to the amendment. In 1975 the Electricity Public Service Law (Ley del
Servicio Público de Energía Eléctrica – LSPEE) was promulgated to rationalise existing
electricity rules in support of the amendment. A 1983 amendment to Article 28 of the
Constitution added electricity to the list of activities where the State may be sole provider.
Paralleling these legal changes was a systematic programme to integrate the
fragmented grid and company structure into a single national electricity system.3 This was
eventually achieved in 1972.
1990 to the present day: need for investment spurs efforts at reform to encourage
private sector participation, in the wake of financial crises and public debt problems
By 1990 the need for reform to encourage investment and modernisation of the sector,
as well as to promote efficiency, was acknowledged. The 1982 financial crisis had already
forced the government to reduce significantly the funds earmarked for energy investment,
as well as for electricity public service subsidies. Some self supply (nearly all of it
co-generation) was allowed before 19924 but the LSPEE amendments in 1992 promoted a
much stronger participation of private players in generation. These could enter the market
as independent power producers (IPPs), for self supply, for co-generation and for smallscale production. Electricity exports, and imports to cover own needs, were also allowed.
A 1993 Presidential regulation (reglamento) to the LSPEE set out what was considered to be
public service or not for regulatory purposes, and defined the conditions for third party use
of the grid. 1995 also saw changes to secure the legal basis for PIDIREGAS projects (public/
private infrastructure projects). These efforts allowed the private sector to participate in
generation infrastructure development with financial support and guarantees from the
Federal government.
The regulatory framework was updated in 1995 to reflect these changes, with
the transformation of the Energy Regulatory Commission (Comisión Reguladora de Energía
– CRE) from an advisory body to one with regulatory powers, which in the electricity
context are related to the issue and management of permits for private generators, and the
interface between private generation and the public electricity service.
General economic context
Since the 1995 peso crisis when GDP fell by 6.2% and the currency depreciated by
nearly 50%, there has been good progress in establishing macroeconomic stability. The
economy continues to diversify with an expansion of the private sector. Membership of
NAFTA has helped Mexico’s progress. Budget targets have been met despite unexpected
developments and volatility in oil related revenues (which account for nearly a third of
total budget revenues). For example the severe oil revenue shortfall from the oil price fall
of 1998 was immediately followed by spending cuts. However the “stop and go” behaviour
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ELECTRICITY
of public spending has made the financing of core programmes erratic. The net debt of the
public sector broadly defined (including liabilities from the financial sector rescue and
public-private partnerships) was 41.2% at the end of 2002. This is not unduly large
compared with other OECD countries but financial savings are low, so the domestic
component of the public debt is large compared with the stock of private domestic
financial assets. This implies that private lending has to some extent been crowded out by
the public sector. A narrow tax base and reliance on oil tax revenues is one of the issues
that need to be taken into account if Mexico were to take on more public debt for
infrastructure investment.
There is a need for significant investment in social and economic infrastructure
including energy, roads, ports, education and health. The eradication of poverty is
a priority. Despite progress, half the country remains in poverty.5 Investment in key
infrastructure is also needed to improve the international competitiveness of the Mexican
economy, which faces challenges such as a rapidly growing share of Chinese exports to
the US, Mexico’s biggest export market.6 A report by the World Bank in 2001 at the request
of the Mexican government listed five key policy recommendations for Mexico’s future:
consolidate macroeconomic gains, accelerate growth through enhanced competitiveness,
reduce poverty by investing in human capital, create environmental sustainability, and
develop more efficient, accountable and transparent government. These echo the
conclusions which have been reached by the OECD in successive recent Economic Surveys
of Mexico.
Main features of the electricity sector
Industry structure
The notion of electricity public service as implied by the Constitution remains at the
core of the current industry structure. Two State-owned entities are responsible for
the electricity public service, the Federal Electricity Commission (Comisión Federal de
Electricidad – CFE), and Central Light and Power (Luz y Fuerza del Centro – LFC), the
company responsible for electricity supply to the Federal District of Mexico City.7 All
transmission assets are owned by CFE and LFC, under the delegated control of the CFE
system operator, the National Energy Control Centre (Centro Nacional de Control de
Energía – CENACE). All distribution assets are likewise owned by CFE and LFC. Both CFE and
LFC are decentralised State entities, a form of State enterprise.
Since 1992 the electricity public service has been supported and complemented by
private generation. Broadly speaking the 1992 LSPEE amendments made room for private
generation in two ways.8 First, independent power producers (IPPs) were allowed into
generation, to supply power for the electricity public service. IPPs sell all their power direct
to CFE and LFC under 25 year contracts called power purchase agreements (PPAs).9 Second,
self supply, co-generation, small scale production and imports and exports were allowed.
Companies that have entered the sector under the permit scheme include a number of
big names in the power industry and beyond: EDF, AES, Transalta, Unión Fenosa, Iberdrola,
Mitsubishi, Tractebel, and Endesa among others.
Capacity and production
CFE remains the dominant generator by far. It accounts for 74% of total generation
capacity (that is, both generation for the electricity public service and for private supply),
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5. ELECTRICITY
LFC 2%, and licensed private generators make up the rest. IPPs supply a still modest but
growing share of capacity for the public service. In terms of what the Energy ministry
(Secretaría de Energía – SENER) defines as current effective capacity (capacidad efectiva),
which takes account of the age and condition of plants, the ratios are CFE (80.7%), LFC
(1.8%), IPPs (7.6%),10 self-supply (6.1%), and co-generation (2.6%).11 Petróleos Mexicanos
(PEMEX) is an important player in the latter two categories, accounting for 47.8% of self
supply and 45.5% of co-generation capacity under these categories, and some 4% of overall
installed capacity.
The 1992 LSPEE amendments have been successful in encouraging IPPs into generation.
They have been somewhat less successful as regards private investment in self supply and
co-generation. IPPs make the largest contribution to generation capacity among permit
holders (that is to say, generation minus the contribution made by CFE and LFC). They
account for 45.09% of total permit-based capacity, with self supply (30.68%), exports (10.63%)
and co-generation (10.49%) next. Permit-based imports account for just 0.20% of the total.
PEMEX accounts for nearly a third of self supply and co-generation permits.
Overall generation capacity has increased steadily over the last few years (Figure 5.1).
But very significant further capacity additions are needed over the next few years to
meet rising demand (Figure 5.1), amounting to roughly half as much again as there is today.
The proposed generation capacity expansion programme for the national electricity
system (sistema eléctrico national – SEN) over the next ten years aims at a total increase of
25 757 MW, compared with a capacity in 2002 of 41 177 MW. The proposed capacity
additions would result in an increase in actual generation from 201.1 TWh in 2002 to
336 TWh in 2012, which represents an annual increase of 5.3%.
According to SENER nearly half of these additions, 12 087 MW, are already under
construction or formally engaged via a firm financing plan. Most are combined cycle gas
turbines (CCGTs), IPPs accounting for 72.8% of the total. This leaves over half uncommitted
so far.
Figure 5.1. Power generation growth 1990-2002
Thousands of GWh
300
263
250
200
150
123
127
130
135
1990
1991
1992
1993
147
151
1994
1995
160
171
180
192
206
214
234
100
50
0
1996
1997
1998
1999
2000
2001
2002
2003
Note: Includes generation by CFE and Independent Power Producers’ production for the electricity public service.
Source: President Vicente Fox’s Third State of the Nation Report, 2004.
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Transmission and distribution
The Mexican transmission grid reflects Mexico’s large size and geography, as well as
its development as a largely isolated system within the American region. The grid extends
the length of the country, but is not yet well meshed, despite recent investment in
interconnections. The SEN is divided into nine areas, of which two (Baja California and
Noroeste) are not connected to the rest, though there are plans to integrate the Noroeste
area in 2005.
Transmission and distribution grids have expanded over the last few years, though
growth has slowed. Figure 5.2 shows the growth in transmission capacity over last ten
years. The grid grew from 545 943 km to 689 928 km between 1993 and 2002. Some 95% of
the grid belongs to CFE and the remainder belongs to LFC.
Figure 5.2. Growth in transmission capacity 1993-2002
MW
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
28
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
Sonora Norte
Norte Sur
Mochis
Mazatián
Juárez
Chihuahua
Laguna
Rio Escondido
Monterrey
Huasteca
Reynosa
Guadalajara
Manzanillo
AGS-SLP
Bajío
Lázaro Cárdenas
Central
Oriental
Acapulco
Temascal
Minatitlán
Grijalva
Lerma
Mérida
Chetumal
Cancún
Mexicali
Tijuana
Ensenada
C. Constitución
La paz
Cabo San Lucas
28
340
27
180
2002
29
5
1
6
2
30
250
27
180
29
230
330
235
3
7
90
30
60
31 110
32
5
1
3
31 140
32
6
275
750
300
4
1993
230
257
2
220
8
235
7
260
2 000
9
11
250
740
180
10
140
14
600
740
650
150
26
750
24
12
15 750
75
300
1 700
18
460 17
13 400
25
2 100
3 100
23
16 950 320
20 1 400 21
150
2
200
19
1 000
22
4
225
220
8
2 100
11
260 9
350
900
200
400
10
14
750
650
300 26
24
12 750 15
1
000
120
1 700
460
18
600
17 5 100 2 100
13 400
25
23
1 400
16 1 700
20
435
400
21
2 200
1 000
90 19
22
320
Source: CFE.
International trade
International electricity trade is not a major feature of the Mexican electricity
landscape. Compared with some other OECD regions the electricity system is relatively
isolated and does not form part of a wider region to the same extent as the US and Canada,
or the European Union (EU).12 Figure 5.3 shows the evolution of international electricity
trade over the last ten years. Mexico is currently a net importer. Total exports dipped
sharply following the 1995 economic crisis, but are now rising again, though they are still
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5. ELECTRICITY
Figure 5.3. Electricity exports and imports 1992-2002
Exports
Imports
GWh
2 250
2 000
1 750
1 500
1 250
1 000
750
500
250
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source: CFE.
very low at less than 500 GWh. Total imports also dipped, but are now rising again, to a
little above 500 GWh. This is a very small amount relative to a total consumption (in 2002)
of 160 203 GWh.
The legal framework for trade in energy is restricted, reflecting the fact that it is an
activity largely reserved to the Mexican State. NAFTA, which came into force in 1994, has
allowed greater access by US and Canadian companies to certain parts of the energy sector,
including investment in electricity generation as allowed under the 1992 LSPEE.13
International interconnections are relatively few and poor. Efforts are being made to
strengthen interconnections with the US in the north, and with Guatemala and Belize in
the south. There are currently two important interconnections which link the Baja
California part of the Mexican grid with the Western System Coordinating Council (WSCC)
of the US, as well as smaller ones further south with the US (with a total capacity of
1 000 MW). There is one small interconnection with Belize (100 MW), and an
interconnection with Guatemala is under construction (200 MW).
CFE engages in international trade mainly for balancing purposes, and to this end has
a number of relationships with US companies. Permits for the private import and export of
electricity are also granted under the 1992 law, linked to co-generation, IPP and small
production projects. Interconnection agreements to support these arrangements exist with
private companies in the US (California, Texas and Arizona), and with Belize to the south.
SENER and CRE are the representatives on the North American Energy Working Group
(NAEWG), which was established in 2001 by Mexico, Canada and US energy ministers to
enhance North American energy cooperation. Goals are to “foster communication and
cooperation among the governments and energy sectors of the three countries on energyrelated matters of common interest, and to enhance North American energy trade and
interconnections consistent with the goal of sustainable development, for the benefit of all
(respecting the domestic policies, jurisdictional authority and trade obligations of
each country)”.
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Fuel mix
Fuel oil (domestically produced) has traditionally made up a large share of the fuel mix
for power generation in Mexico. But its share is decreasing with the growth of natural gas
used in CCGTs, which now accounts for 29.8% of power generated for the electricity public
service, compared with 15.5% in 1993. There is one nuclear power plant, which accounts
for 4.8% of generation. Hydroelectric power is down from 17.2% of generation in 1993
to 12.4% today because of water problems. Coal use (mainly domestic production) remains
relatively steady at 8%. Renewables (wind and geothermal) account for 2.7% of generation.
The capacity picture broadly underlines the same trends. The largest share of installed
capacity for the electricity public service is conventional thermal power plants (34.7%,
down from 47.2% in 1992), for which fuel oil and coal are the main input fuels, followed by
CCGTs (17.8%, up from 6.7% in 1992) for which natural gas is the input fuel. The capacity
share of hydroelectric plants has come down from 29.3% to 23.3% since 1992.
Demand and consumption
Past trends show a steady and significant rise in consumption, higher than the OECD
average. Between 1993 and 2002, consumption growth in the electricity public service
averaged 5%, higher than the average GDP growth of 2.7% over this period (Figure 5.4). The
growth of peak demand consumption has been even higher in some regions. Sales to
industrial consumers in terms of GWh are highest at 59% of the current total, followed by
residential users (24%), commercial users (8%), agriculture (5%) and public services (4%).
These proportions have remained relatively unchanged over the last ten years.
Projections for the future also show strong expected growth, above the expected GDP
growth rate. SENER has analysed three electricity demand growth scenarios for the
period 2003-12. These are based on three sets of assumptions about economic growth, as
well as other important variables.14 The “Planning scenario” assumes a GDP average
growth rate of 4.7%. The “High scenario” assumes a GDP average growth rate of 5.6%. The
“Moderate scenario”15 assumes an average GDP growth rate of 3.2%. The Planning scenario
is considered to be the most likely outcome, and forms the basis of government plans for
development of the SEN, which also assume that the current legal framework for the
electricity sector is unchanged. The other main variables are the prices of input fuels (the
Figure 5.4. Electricity consumption and GDP growth 1993-2002
GDP
%
12
Users
Electricity consumption
10
8
4.4%
5.0%
5.1%
6
4
2
3.7%
1.9%
0
2.7%
-2
-4
-6
-8
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Source: CFE.
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5. ELECTRICITY
price of natural gas increases under all three scenarios), electricity prices (different
assumptions are made about a move toward more cost reflective prices), population and
housing changes, and (because the projections are to help with developments of the SEN,
which excludes self supply) developments in self supply and co-generation.
SENER projects an average growth rate of 5.6% over the coming ten years (6.2%
and 4.2% for the high and moderate scenarios). This implies an increase in consumption
(including self supply) of 298.1 TWh (315.5 TWh and 259.6 TWh for the high and moderate
scenarios). The main spur for higher consumption growth over the next decade is projected
to come from the industrial sector (especially middle sized industry). Residential growth is
projected to be roughly the same as it has been over the last ten years.
Figure 5.5. Electricity consumption projections 2003-12 (planning scenario)
TWh
300
250
200
150
100
50
0
Autoab.
Serv. Púb.
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
9.1
10.9
11.1
12.1
12.4
18.4
22.1
22.9
23.3
23.6
23.6
26.6
26.8
27.0
27.2
137.2 145.0 155.3 157.2 160.2 161.0 169.1 179.7 191.1 201.2 213.7 224.7 239.7 255.4 271.0
Source: CFE.
The current legal, regulatory and governance framework
The legal framework
The Mexican electricity sector is regulated at the Federal level by the Constitution,
by a number of primary laws, and by secondary regulations, notably Presidential
reglamentos. The current legal framework makes limited provision for private participation
in generation only.
The starting point for the legal framework is Articles 25, 27 and 28 of the Constitution.
Article 25 states that the public sector has exclusive responsibility for the strategic areas noted
in Article 28 which include the electricity sector, and the Federal government owns and
controls any organisations set up in these areas. Article 27 states that the State has exclusive
rights over all the activities related to the provision of electricity for public service (generation,
transmission, distribution and supply, etc.), under the terms defined by the law. Against this
background it is argued that private providers may not be granted the right to supply electricity,
and the State may use whatever goods and natural resources are needed to ensure public
service. Article 28 lists the strategic areas/activities where the State may be sole provider
(monopolies are forbidden by the Constitution so this article is needed to provide legal support
for them). The list includes electricity (without further definition of the term).
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The Constitutional provisions are supported and developed by several underpinning
primary laws, as well as secondary legislation:
●
The most important is the Electricity Public Service law (Ley del Servicio Público de Energía
Electrica – LSPEE) and its reglamentos. First adopted in 1975 to establish exclusive Federal
responsibility over the electricity industry, it was amended in 1992 to allow an element
of private participation. The law as it now stands enables private participation in
electricity provision via IPPs, self-supply, co-generation, small scale generation and
imports/exports; regulates the activities relating to electricity public service and private
participation notably the permit process (see Box 5.1 below); and is the framework law
for CFE and LFC’s objectives, activities and governance.
●
The CFE organisation law (Estatuto Orgánico de la Comisíon Federal de Electricidad) and the
LFC organisation decree (Decreto por el cual se crea el organismo descentralizado Luz y Fuerza
del Centro), as well as the Law on Parastatal Entities (Ley Federal de Entidades Paraestatales)
complement the LSPEE on CFE and LFC governance issues.
●
The Energy Regulatory Commission law (Ley de la Comisión Reguladora de Energía – CRE
law) gives the CRE its regulatory powers over public and private operators, including
jurisdiction to grant permits to private generators and regulate their activities.
●
The Public Debt Law (Ley General de Deuda Pública) and the Budget and Expenses Law (Ley de
Presupuesto, Contabilidad y Gasto Público Federal) set the legal framework for public/private
infrastructure projects.
Regulatory authorities
The industry is overseen and regulated by a number of Federal bodies. The main ones
are the Ministry of Energy (Secretaría de Energía – SENER), the Ministry of Finance and
Public Credit (Secretaría de Hacienda y Crédito Público – SHCP) and the Energy Regulatory
Commission (Comisión Reguladora de Energía – CRE).
SENER is responsible for overall policy, planning and strategy for the energy sector.
It produces an Energy Sector Plan which links in to the President’s Office National
Development Plan, as well as fuel specific long term outlooks. It is legally responsible for
conducting Mexico’s energy policy with particular reference to the nation’s interest in the
petroleum and electricity sectors; conducting, together with the Ministry of Foreign Affairs,
Mexico’s international energy relations; promoting private sector participation in power
generation; developing and implementing medium and long term energy sector planning;
ensuring that energy sector activities are being conducted in conformity with
environmental laws and regulations; performing and disseminating research and studies
on energy issues; preparing and disseminating norms (standards) and directives related to
the energy sector; and monitoring the activities of PEMEX, CFE and LFC.
SHCP has two major roles. It has financial responsibility for CFE and LFC, approving
their budgets as State enterprises. It also establishes the tariff methodology for electricity
public service tariffs, and sets tariffs.
CRE is a form of State entity (organismo desconcentrado)16 which reports to SENER. It
has a collegiate board structure of five commissioners appointed by the President from
candidates put forward by SENER, for renewable, staggered five year terms. Decisions are
taken on a collegiate basis. It has a staff of around 150 with civil servant status, covering a
range of relevant expertise (legal, economic, technical etc.). It was originally set up in 1992
as an advisory body, and in 1995 was given regulatory powers over the newly opened
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5. ELECTRICITY
downstream gas market as well as the electricity market (linked to the 1992 LSPEE law
amendment which allowed some private participation in the electricity market). Its powers
over the electricity sector are more limited than for gas, reflecting the weaker reforms that
have so far been implemented relative to the stronger downstream market opening of the
gas sector.
The CRE law defines the areas in which it exercises responsibilities: the supply and
sale of electricity for the public service to end consumers; private sector generation,
imports and exports; the purchase of power for the electricity public service; and
transmission services between the entities that provide the electricity public service (CFE
and LFC) and private generators.
To this end, CRE has several regulatory functions. First, it administers the permit
system for private participation in generation. It awards, monitors, modifies and cancels
permits.17 This involves such activities as site inspections to check that obligations are
met and that the permit holder is in conformity with official Mexican standards (Normas
Oficiales Mexicana – NOMs),18 and issuing directives to that effect. Second, it approves the
methodologies and values used by CFE/LFC to calculate the cost of transmission services
(such as ancillary services) between them and private generators, as well as between CFE
and LFC. It also approves the methodology to determine the cost of payment for power
acquisitions by CFE/LFC from permit holders. It resolves disputes between permit holders
and CFE/LFC, and may impose administrative sanctions for non-respect of its regulations.
CRE also monitors CFE and LFC’s energy acquisitions for the electricity public service, and
approves agreements and contracts for the provision of the services which they offer.
The role of the competition authority (Comisión Federal de Competencia – CFC or COFECO)
is currently extremely limited but not wholly irrelevant. Article 28 of the Constitution sets
out a broad prohibition of monopolies, monopolistic practices, and State monopolies. But it
goes on to provide that the functions exercised exclusively by the State in specified “strategic
areas”, of which electricity is one,19 will not be deemed to constitute monopolies in this
context. The competition law however not only reflects, but details the boundaries of the
Constitutional exemptions. Article 4 restates the strategic area exclusion, but adds the
important provision that State-owned enterprises are subject to the law with respect to
monopolistic practices that are not specifically within a strategic area’s scope. PEMEX
activities have been scrutinised under this heading, and CFC has also reviewed bid
applicants for the award of a contract for the supply of electric power by an IPP.20 CFC, in
other words, may intervene in areas that are not related to electricity public service (for
example interconnection), though there has been little involvement so far. CFC could
therefore complement the CRE in areas where the latter’s remit is currently weak or unclear.
CRE and CFC have an agreement (Convenio de Colaboración Administrativa) under which
they hold regular meetings to share views. They jointly sponsored a conference in
May 2002 to consider alternatives for the efficient development of the electricity sector.
The Federal Commission for Better Regulation (Comisión Federal de Mejora Regulatoria
– COFEMER) was set up to oversee the drafting of Federal regulations with a view to
improving their quality. Key activities include the analysis of all new draft regulations
and their Regulatory Impact Assessments or RIAs (Manifestación de Impacto Regulatorio – MIR),
as well as analysis of proposals for the reform of existing laws in specific sectors. These
analyses, which are publicly available, include the current proposals for electricity reform,
and are an important contribution to the debate on reform.
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Regulation
Regulation reflects the limited legal market entry options, and a longstanding
subsidisation of electricity tariffs. Its main features are end user tarification, and a permit
system for private generators.
End user tarification
Box 5.1 sets out the principles of tariff regulation. In principle all electricity tariffs are
based on cost of service. In practice however, a number of factors limit the extent to which
tariffs are cost-related. A key factor is the heavy subsidisation of the residential and
agricultural sectors.
The residential tariff system is regressive: it favours high consumption users in
the hotter states (who tend to be wealthier consumers using air-conditioning). The
government recognises this, as well as the fact that residential subsidies are generally too
Box 5.1. End user tariff regulation
Tariff regulation is based on a system that groups users into different groups, and which
also takes account of voltage and demand characteristics (notably the daily and seasonal
consumption patterns in different parts of the country, which is divided for this purpose
into eight regions).
There are five user groups: residential, commercial, public services, agricultural and
industrial. Residential tariffs apply to all residential users regardless of electricity
consumption levels (in other words there is a “flat rate” for all residential consumers).
Residential consumers may, however, opt for commercial tariffs though they do not do this
because the tariffs (unsubsidised) are higher; and they may also move from low to medium
voltage, upon payment to CFE. Commercial tariffs apply to the low voltage use of electricity
for commercial services (in other words the private service sector). Public service tariffs
cover electricity supply for public services such as street lighting and water pumping, in
other words the government’s use of electricity. Agricultural tariffs cover the low or
medium voltage use of electricity for agricultural water pumping and irrigation. Industrial
sector tariffs cover electricity usage in industry.
In principle all electricity tariffs are based on cost of service. Tariff levels are organised
around an average price for the different groups of users, and the tariff structure is linked
to the charges that make it up and different costs of supply across the country.
A range of residential tariff subsets have been established (tariffs 1A-F, and tariff DAC).
These are defined according to the average monthly summer temperature, as recorded by
the Environment ministry (Secretaría de Medio Ambiente y Recursos Naturales). Tariff DAC,
introduced in 2002, covers high consumption users. Residential tariffs are also subdivided
into winter and summer, the difference being that summer tariffs are lower, across a
broader consumption range.
In principle industrial tariffs are based on long term marginal costs, reflecting cost
differences (voltage levels, hourly, daily and seasonal consumption, and regions). Monthly
increases are applied to these tariffs (by reglamento under the LSPEE), based on the
producer price index and fossil fuel price changes. Proposals are tabled by CFE. A working
group on electricity tariffs (Grupo de Trabajo sobre Precios de Electricidad) chaired by SHCP and
including representatives of SENER, the Economy ministry, CRE, CFE and LFC considers and
approves the changes.
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high. In 2002 it reduced its subsidy transfer, and sought to redirect subsidies toward the
lowest income consumers. Low consumption users (75.9% of users) were not affected, the
subsidy for moderate consumption users (21.5%) was partly reduced, and the subsidy for
very high consumption users linked with high income (2.1%) was removed with the
creation of the new DAC tariff. Overall some 5% of the population lost its subsidy, and 75%
kept it all. Residential tariffs were also restructured into low and moderate consumption.
Nevertheless the political sensitivity of the subsidy system is such that even these modest
reforms were strongly opposed.
An update of the tariff structure and methodology, which has not been undertaken for
at least eight years, is currently underway21 in the context of the National Development
Plan (Plan Nacional de Desarrollo 2001-06) and the Sectoral Energy Plan (Programa Sectorial de
Energía 2001-06). CRE is currently overseeing a bid for tenders by independent consultants
to carry out this work, with the support of a tariff working group that includes SHCP,
SENER, CFE and LFC. The consultants are being asked to determine strategies for meeting
productivity and efficiency goals, based on long term marginal cost analysis, and an
evaluation of efficiency (technical and operational costs). CFE/LFC cost allocation and
subsidies are to be reviewed as part of this process. Real time tarification for relevant users
will also be considered.22
The permit system, grid interconnection and related issues
Eligible private investors under the 1992 LSPEE amendment must apply for a permit
from CRE. CRE oversees the permit system for private participation in generation, with the
significant involvement of CFE: the regulator must ask CFE for its opinion on permit
applications. CFE considers technical and related issues raised by an application, such as
the implications for ancillary services23 and the delivery of surplus energy to CFE. It also
proposes plant sites. Permits have an indefinite duration, except for IPP permits which run
for up to 30 years.
CFE is in charge of planning IPP projects, and conducting an international bidding
process, on the basis of which CRE allocates the permit. Permits may be revoked by CRE if
the permit holder does not comply with its obligations.
CFE’s imports and exports (mainly used for balancing) must be authorised by CRE and
SENER, respectively. Private participants may apply for permits to import for their own
supply, or to export.
Most self supply and co-generation projects need interconnection with CFE’s grid
to move electricity to their consumption sites, and to sell surplus electricity to CFE.
Co-generation and self supply projects may deliver up to 20 MW of surplus generation to
the grid at any time and receive payment for it. 24 CRE has established a payment
methodology for surplus generation. CFE must allow co-generators and self suppliers
access to the grid for this, and offer necessary back up services. If private generators build
a private line which interconnects with the grid, the new infrastructure must be
transferred to CFE.
CFE and LFC governance
CFE and LFC are a form of State-owned enterprise set up as public bodies (organismos
descentralizados con autonomía de gestión). This type of entity belongs to the State and
their accounts are consolidated into the government’s general public accounts. But they
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may earn revenues from the sale of goods and services and retain these earnings for
investment, for operating expenses, or to pay taxes. Within this context, the LSPEE sets the
more specific framework for CFE and LFC’s governance, complemented by a statute for CFE
and a decree for LFC. Key objectives under the legislation are to provide the electricity
public service (as defined in the LSPEE); maintain and develop generation and
transmission; and assist SENER in long term planning.
CFE has a Director General appointed by the Presidential Executive, and is overseen by
an Governing Council (Junta de Gobierno). The Council has eleven advisers, is chaired by
SENER, and includes representatives of SHCP and the Economy and Environment
ministries, four representatives of the Presidential Executive, and three labour
representatives. CFE was established by law in 1937.
LFC has a similar governance structure, with a Director General also appointed by the
Presidential Executive. It has a Governing Council (Junta de Gobierno) chaired by SENER, with
the participation of SHCP, the Economy and Environment ministries, three union
representatives, and the Director General of CFE (who presides if SENER is absent). LFC is a
more recent development than CFE, established by Presidential decree in 1994 out of the
liquidation of concessionary companies, in line with the 1960 Constitutional amendment
and related change to the LSPEE which established electricity as a public service.
Public/private investment projects
Various public-private partnership schemes have been set up in recent years (see
Box 5.2). Their objectives are to overcome legal barriers to private investment in
Box 5.2. Public private infrastructure financing schemes: PIDIREGAS and IPPs
The PIDIREGAS scheme (Proyectos de Infrastructura Productiva de largo plazo con impacto
diferido en el Registro del Gasto) was set up in 1995. It aims to postpone the impact of projects
on public expenditure. A private company finances and builds the plant, with no payment
due by the public sector until completion. When the project is completed, it is delivered to
the public sector, which becomes the owner and pays for the contracted obligations.
Payment obligations for the first two years are considered as direct liabilities and recorded
as investment spending in the public sector financial accounts. The rest are registered as
contingent liabilities to be covered by the flow of income that will be generated. PEMEX
investments are typically PIDIREGAS. OPF (Obra Pública Financiada) projects are a particular
form of PIDIREGAS project. The investor builds the power plant or transmission line, and
on completion CFE purchases the assets with a PIDIREGAS financing mechanism.
A variation on PIDIREGAS has supported the development of Independent Power
Producers (IPPs). The assets remain in private hands, and the government only acquires
the plant if some previously established eventuality occurs. A PIDIREGAS mechanism is,
however, used to underpin government guarantees for the purchase of electric power.
These take the form of a long term contract (usually 25 years) established between IPPs
and CFE for the sale/purchase of electricity and capacity. CFE assumes the risk of the
investment and must record the investment as a contingent liability, but it is not recorded
in the financial accounts or in the PSBR. If it is taken over by the public sector it becomes a
standard PIDIREGAS.
Source: OECD Economic Survey of Mexico 2003 and Mexican government.
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infrastructure projects, not least in the energy sector, to reduce the burden of
infrastructure projects on public finances, and to promote adequate, stable investment in
infrastructure. Though the public sector deficit, which includes State enterprises, has been
reduced over recent years, general government revenue remains low relative to GDP. The
tax/GDP ratio at 18.5% is the lowest in the OECD and one of the lowest in Latin America. Tax
revenue is half the OECD average. It is also highly dependent on volatile oil-related
revenues (world oil prices varied from USD 35 a barrel to less than USD 25 a barrel in 2003,
and PEMEX accounts for around a third of tax revenue). These factors do not provide a
stable basis for infrastructure planning based on public investment.
An important difficulty with these schemes is that some effect on public finances and
liabilities cannot be avoided. For PIDIREGAS, though recording in the financial accounts
only starts when payments start, the public sector borrowing requirement (PSBR) starts to
record the resources involved at the time the project is initiated. This therefore is the point
at which the public sector obligation is created. Also, future revenue flow is intended to
cover the cost of construction, so as to be budget neutral, but the private sector does not
share the financial risk of the project. Finally, funding for the whole project is approved by
Congress when the project is launched, so the project has a de jure preferential status
concerning future disbursements. For IPP projects, since they only generate for CFE, their
financing requires a contract that includes an adequate payment obligation on CFE so as to
guarantee the debt amortisation. Financial markets will consider this guarantee as
sovereign debt, so it is nearly equivalent to a State investment, even if it may have a lower
cost. More generally if a private entity fails, it is almost certain that the State would have to
take over the project. Private companies therefore have an incentive to underestimate their
true costs.
Issues with the current regulatory and governance framework
The regulatory framework raises a number of concerns, which may be limiting the
effectiveness and efficiency of the current market structure. Notably, self suppliers and cogenerators may be dissuaded from entering the market in greater numbers.
●
Institutionally, the regulatory authorities are weak and CFE is strong. Information
asymmetries between CFE and its regulators appear to be very strong. CFE for example is
the source of most of the information for SENER’s planning exercises, 25 and for
tarification data for the tariff working group. Broadly speaking the regulators usually
need to act on proposals and information provided by CFE.
178
●
As the owner of CFE whose accounts form part of the public accounts, the regulator for
tariffs and manager of the aprovechamiento system, SHCP faces a potential conflict of
interests over the decisions it has to take (management of the State budget versus
management of CFE’s finances). SHCP is also understaffed for the effective management
of its roles.26
●
CFE exercises a number of quasi-regulatory functions in a number of areas: notably it
manages the IPP bidding process, and proposes tariff changes. As the dominant electricity
supplier this puts it in a strong position to dictate the outcome on these issues.
●
Though CRE has a number of strengths27 such as clear objectives, a good degree of
transparency, and a reasonably well structured collegiate board, it is held back by its
limited powers over the electricity sector. Its status gives it only a limited degree of
independence vis-à-vis SENER. Its regulatory powers over the electricity sector mainly
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relate to the permit regime, where it acts on the advice of CFE, and it only has an
advisory role over tariffs. Its powers over interconnection issues are weak, even allowing
for the current limited market structure. It does not have powers to regulate the terms
and conditions for interconnection with CFE’s grid, which have to be negotiated by
private generators with CFE. This raises a potential conflict of interest for CFE because it
is also a generator. Also the (obligatory) transfer of any new infrastructure built to access
the grid by a private company must be negotiated with CFE, a negotiation of unequals in
which CRE plays no part.
Electricity performance
A number of elements need to be taken into account in evaluating the performance of
an electricity sector. As well as current performance, they should ideally include an
assessment of likely performance over the longer term, given the state of current
infrastructure, the lead times for new investment and expected developments in power
generation technologies and input fuels.
Tariffs and subsidies
Table 5.1 shows the evolution of average electricity prices between 1995 and 2003 for
the different user categories of the Mexican system. Tariffs are highest for commercial
services, followed by public services. These users pay considerably more than the other
categories. Tariffs for agriculture are by far the lowest, and have decreased slightly
since 1995. Subsidies, which are reviewed below, are the main reason for tariff differences
(though differences in the actual costs of supply to different categories of consumer are
also relevant).
Table 5.1. Electricity average prices (cent/KWh) 1995-2003
by category of consumer
1995
1996
1997
1998
1999
2000
2001
2002
20031
Residential
70.16
66.07
64.36
64.62
62.53
64.79
66.19
80.35
86.25
Commercial
167.41
157.23
155.6
152.65
150.16
146.08
142.07
142.74
158.21
Public Service
131.99
115.51
113.61
111.7
120.43
118.23
121.34
123.19
129.84
Agricultural
37.44
34.68
33.65
33.44
32.65
33.24
34.14
34.91
35
Industrial
56.61
58.55
62.93
58.66
57.12
62.05
60
63.22
73.5
Total
71.06
68.74
70.48
68.15
66.34
69.79
69.03
74.86
83.15
Constant price: 2003.
Note: Public service in this context means services such as street lighting, not to be confused with the much broader
concept of electricity public service.
1. June 2003.
Source: Ministry of Energy (SENER).
Figure 5.6 shows how Mexican household electricity prices compare with those of
other OECD countries. Household prices are low, but if adjusted for Purchasing Power Parity
(PPP) which is a more accurate basis for comparison, they are around the OECD average.
Cost-reflective tariffs are critical to the efficient operation and development of
electricity markets. They provide key signals for efficient usage and investment decisions,
and underpin the financial viability of market players, which includes their ability to invest
over the longer term.
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Figure 5.6. Comparative assessment of household electricity prices
around the OECD
Unadjusted
Using PPP’s
United Kingdom
Turkey
Switzerland
Slovak Republic
Portugal
Poland
Norway
New Zealand
Netherlands
Mexico
Korea
Japan
Italy
Ireland
Hungary
Greece
France
Finland
Denmark
Czech Republic
Austria
0
0.05
0.10
0.15
0.20
0.25
$US/kWh
Note: Includes taxes.
Source: IEA Energy Prices and Taxes, 3rd Quarter 2003.
Though policy is to have a price/cost correspondence, in practice Mexican electricity
tariffs are not cost-reflective.28 Subsidies are significant, but not wholly transparent
because of the aprovechamiento system.29 Under the LSPEE, CFE30 must pay the government
a rate of return on the assets that it uses to provide the electricity public service
(“aprovechamiento para obras de infrastructura eléctrica”). The assets are those reported
in CFE’s annual financial returns. SHCP fixes the rate, which is currently 9%. But the money
is essentially transferred back to CFE so that it can invest in infrastructure investment to
support electricity public service. At the same time, the payment can be set against the
revenue losses incurred in tariff subsidisation.
The aprovechamiento system therefore mixes up the rate of return on assets, payments
by the government for infrastructure investment, and payments by the government to cover
the cost of subsidies incurred by CFE. Tracking the subsidy element is a problem in this
system. It is also not clear how the money destined for investment – however much this is –
is tracked to its end use. At any rate none of this is clear from publicly available information.
CFE notes that its subsidisation of tariffs cost it 13 011 million pesos more than its
aprovechamiento payment to the government in 2003, and that its losses for that year were
6 024 million pesos, mainly due to the subsidies. LFC’s financial statement for 2003 shows
that its receipts were some 28 875 million pesos, cost of service was some 49 476 million
pesos, and government transfers were some 21 043 million pesos.31
Table 5.2 needs careful interpretation as some categories involve higher real costs
than others. Nevertheless it suggests that the most heavily subsidised group is agriculture,
then residential. Industry and public services get some subsidy. The commercial sector
appears to be charged above costs by CFE.
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Table 5.2. National electricity sector, price/cost ratio for different user categories,
20031
Price/cost ratios2
Subsidies (millions of pesos)
Sector
Domestic
CFE
LFC
SEN
30 352
11 462
41 814
0.48
0.34
0.45
4 164
4 164
1.07
0.58
0.87
Commercial
Services
CFE
LFC
SEN
695
1 103
1 798
0.90
0.66
0.82
7 787
94
7 882
0.26
0.14
0.26
Industrial M.V.
3 488
6 891
10 378
0.91
0.61
0.82
Industrial H.V.
2 407
953
3 360
0.89
0.69
0.87
44 729
24 668
69 397
0.73
0.54
0.68
Agriculture
Total
Note: The table does not include Federal government tariffs.
1. Estimated end year figures.
2. Takes into account the accounting cost of each entity.
Source: Ministry of Finance (SHCP-UPI).
Costs, efficiency and productivity
CFE and LFC’s costs are not set out at a sufficient level of disaggregation32 to establish how
much goes to different activities (fuel costs, generation, transmission etc.), so a key element of
analysis to assess efficiency, including on a comparative international basis, is missing.
Productivity measures should cover issues such as employment relative to grid size
(number of employees per km of transmission/distribution lines), generation capacity
(number of employees per KW of installed capacity), and number of users. According
to SENER, CFE’s employment fell (from 107 926 in 1980 to 77 542 in 2001), whilst LFC’s
employment rose (from 29 476 to 37 132 over the same period). CFE reports that the number
of consumers per worker (usuarios por trabajador operativo) has risen from 294 in 1998
to 334.54 in 2003. These figures are not enough to make a definitive assessment of
developments, but suggest that CFE has been making progress, whilst there is a problem of
productivity with LFC.
Quality of service
The proportion of the population connected to the grid is a fundamental statistic for
all countries. Grid connection in Mexico has expanded steadily, though at an increasingly
slower rate, over the last ten years or so to reach 95% of the population (Figure 5.7). This is
a considerable achievement,33 given where Mexico started not so long ago, and the
country’s size and topography. There is a need for more distribution infrastructure to reach
remote villages with a population of less than 100, but it is perhaps understandable that
this has not yet been achieved. In a country with significant renewable energy potential, it
may not be sensible to aim at 100% grid coverage: the aim instead might be to explore
further the scope for locally based generation from renewable sources such as wind.
Service quality and reliability standards should cover issues such as the stability of the
power supply (voltage and frequency), supply interruptions (length and frequency), and the
time taken to restore supply, and arrangements for notification of interruptions.
Unlike in many other OECD countries, CFE and LFC do not currently have any formal,
explicit obligations to meet quality of service targets. Both entities however make their
own efforts to set and meet certain standards. Information provided on their Web sites
includes the following. CFE reports on the connection time for new users (which has
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Figure 5.7. Percentage of the population connected to the electricity public service
94.5
94.7
94.7
94.7
1994
1995
1996
1997
94.7
94.7
94.7
94.7
95.0
95.4
91.6
90.9
89.4
87.6
1990
1991
1992
1993
1998
1999
2000
2001
2002
20031
1. Expected.
Source: President Vicente Fox’s Third State of the Nation Report, 2004.
declined a little since 1998), and length of interruptions (down from 160 minutes in 1998 to
121 minutes in 2003). LFC covers interruption times (tiempo de interrupción por usuario en la
red de potencia – TIUP) which was 27.63 minutes in 1998 with a target of 16.2 minutes
for 2003. It also provides an index of voltage control (indice de control de voltaje – ICV) which
needs to meet a predetermined range. Other LFC reported standards are an operating
security target (tiempo promedio de reestablecimiento de líneas de transmisión – TPR), and a
continuity of service target (tiempo promedio de reestablecimiento de la carga – TPRC).
System reliability
Box 5.3 sets out the definition used by the International Energy Agency (IEA).
Capacity and reserve margins
CFE sets generation reserve margin standards for the Mexican electricity public service
in coordination with SENER. It makes a distinction between the Reserve Margin (Margen de
Reserva – MR), which is based on installed capacity, and the Operative Reserve Margin
(Margen de Reserva Operativa – MRO) which is based on capacity which is expected to be
available in practice and which is also considered to be the minimum necessary margin for
ensuring system stability without submitting the system to continuous excessive pressure.
Current margin standards for the interconnected regions of the grid are 27% and 6%,
respectively.34 Figure 5.8 shows the evolution of actual reserve margins in relation to the
standards, and projections to 2012.
Even allowing for differences in calculation methodologies, Mexico’s reserve margin
standards seem relatively low compared with many other OECD countries. Performance
relative to the operative reserve margin standard appears to have deteriorated through
the 1990s, and the projections to 2012 suggest that the system will in future be operating at
the limit of the MRO.
Transmission and distribution
Much of the network is old (50-60 years), and poorly maintained. Stability of voltage
and frequency is an issue. The grid needs to be both updated and strengthened. A
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Box 5.3. Defining the components of system reliability
The IEA defines security of supply as the likelihood that energy will be supplied without
disruption (economic variables such as price levels and price volatility are excluded from
the definition). For electricity, the IEA notes that security of supply depends on three
factors: adequate investment to provide enough generation capacity to meet demand,
adequate transmission and distribution networks to transport electricity, and an adequate
portfolio of technologies to deal with variations in the availability of input fuels. These
three elements are intertwined and should not be considered in isolation. For example, a
well meshed transmission network allows more distant generation capacity to be taken
into account in calculating the reserve margin.
Generation capacity and reserve margins
The generation reserve margin is the measure normally used to determine whether
there is enough generation capacity to meet demand. This may be broadly defined as the
percentage of installed capacity in excess of peak demand over a given period (such as a
year, month or day). Installed capacity generally refers to the generation assets located
within a given geographical area but can be adjusted in a number of ways, for example by
adding import transmission capacity, and making allowances for outages (capacity which
becomes unavailable due to maintenance needs and equipment failure).
Transmission and distribution networks
Though transmission accounts for a relatively small share of the total cost of electricity
supply, it is an essential part of the investment that needs to be made in an electricity
system. Investment to strengthen transmission networks is a growing issue in many parts
of the OECD. Well meshed transmission lines with adequate capacity underpin a smooth
and reliable system operation, which can withstand unexpected power plant outages or
other unplanned events. They also reduce the cost of supplying electricity, because
generation reserve margins can be pooled. Conversely congested transmission lines
increase the cost of supplying electricity, as power from low cost generation sources may
be unavailable where it is needed. A congested network also creates a major difficulty in
the liberalisation of electricity markets. Transmission links often need to be strengthened
to accommodate new patterns of trade under competition. However building new lines is
increasingly difficult because of siting and environmental restrictions, as well as local
resistance. Incumbent utilities, to the extent they remain vertically integrated, may lack
incentives to increase interconnections as it is not in their interest to facilitate electricity
trading by competitors.
Power production technologies and input fuels
The third element of system reliability is the mix of power generation technologies, linked
to the availability of input fuels. An adequate portfolio of technologies needs to be in place
to deal with potential variations in input fuels. The availability of the major input fuels used
in a country’s power system should at the same time be secured and strengthened, where
necessary, for example access to sources of natural gas.
Source: IEA Security of supply in electricity markets, IEA 2002.
development programme for 2003-07 includes both grid capacity expansions (an addition
of 16 700 km to the grid) and additional interconnections. This investment programme
appears essential to maintain reliability.
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Figure 5.8. Reserve margins for the interconnected grid
Reserve margin
%
80
Operative reserve margin
70
60
50
40
30
20
10
0
1985 1990 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: CFE.
Power generation technologies and fuel inputs
Figure 5.9 shows the expected evolution of technologies.
Mexico currently has a good diversity of generation technologies. Whilst the portfolio
of technologies will remain broad, the share of combined cycle gas turbines (CCGTs) is
expected to increase very significantly from 22.3% to 54.1% of total generation.35 The
evolution of Mexico’s power generation technology portfolio broadly reflects that of other
OECD countries: a diminishing use of heavy fuel oil and a growing use of natural gas.
Figure 5.9. Expected development of generation technologies 2002-12
2002
201 059 GWh
2012
335 976 GWh
Combined Cycle 53%
Turbogas 2%
Coal Fired 5%
Nuclear 3%
Renewables 12%
Combined Cycle 22%
Turbogas 3%
Coal Fired 8%
Nuclear 5%
Renewables 15%
Dual Fired 7%
Conventional Thermal 19%
Conventional Thermal 40%
Dual Fired 6%
Source: CFE.
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Figure 5.10. Increase in gas imports
Billion cubic feet/day
Canadian production
Canadian exports
Mexican production
Mexican exports
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2001
0
2
4
6
8
10
12
14
16
18
Source: US Energy Information Administration (EIA).
The main issue for Mexico in this context is the growing use of natural gas imports36
against a background of significant domestic gas reserves which are not effectively
exploited. Mexico has some 15 billion cubic feet of proven reserves, but uncertainties over
this figure arise from the fact that there has not been enough recent investment in
exploration.37 As a consequence, imports are rising fast (Figure 5.10, which also shows, for
comparison, Canadian production and exports).
Another issue is the surprising downward trend for the share of renewables (from 15.1%
to 11.9%), despite the fact that Mexico is relatively well favoured with geothermal, wind, and
solar sources of renewable energy. According to SENER for example, Mexico’s solar potential
is one of the highest in the world.38
A major part of any assessment of future system reliability concerns investment.
Mexico’s own estimates show the need for a very significant amount of future investment.
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SENER estimates total investment needs between 2003 and 2012 to meet the expected 5.6%
annual demand growth at 583 thousand million pesos. A significant part of these needs,
38.3%, would be for generation, while 22.2% would be for transmission infrastructure,
23.3% for distribution infrastructure, and 12.8% for maintenance. SENER projects that a
little more than half of this total would need to be private investment, and that most of the
generation investment would be private. CFE and LFC would focus on investment in
transmission, distribution and maintenance.
Figure 5.11. Investment needs 2002-11
Million pesos 2003
250
200
150
100
50
0
Generation
Transmission
Distribution
Maintenance
Other
Source: CFE.
To the extent that Mexico expects to rely on private investment to meet its needs, its
requirements need to be appreciated against the background of a huge global demand for
investment in the power sector over the period to 2030, and uncertainties over its
availability (Box 5.4). The main message of relevance to Mexico is the importance of
ensuring that its future regulatory environment for the electricity sector is stable, clear and
predictable. Regulatory risk is a major factor for investors weighing up the options. It can
delay or discourage investment. Regulatory risk at a time of reform, resulting from
uncertainties regarding the new rules and the industry structure, is particularly apt to
deter investment.39 Adjustments to the regulatory environment seem manageable by
investors, provided the general direction of reforms and the role of the regulator are
sufficiently clear.
The current regulatory and governance framework does not facilitate investment by
CFE and LFC in the electricity supply chain, or encourage them to meet investment needs
from their own resources, for example by reducing costs. Under the aprovechamiento
system, it appears that CFE incurs a deficit by virtue of having to pay subsidies, the costs of
which are not fully recovered from the government. But equally important, the costs
incurred by CFE and especially, LFC for the provision of electricity are likely to be higher
than might be expected under stronger regulatory oversight and a competitive market.
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Box 5.4. Global power sector investment needs 2001-30: the IEA view
The IEA estimates that almost USD 10 trillion of the total of USD 16 trillion of capital
needed between now and 2030 in the energy industry will be for the power sector, because of
relatively rapid growth in demand and the much higher capital cost of electricity per unit of
energy supplied compared with fossil fuels. Around USD 4.5 trillion will be needed for power
generation. Developing countries will account for the larger part of both new capacity and
investment. Transmission and distribution together will call for USD 5.3 trillion of capital,
55% of which will be spent in developing countries.
More private sector involvement in developing countries will be required. How
successful those countries will be in attracting private capital is one of the biggest
uncertainties about future electricity investment. In fact private electricity investment has
been declining since 1997. There are major uncertainties about when and to what extent
private electricity investment will rise again and where the new investors will come from.
Renewed expansion of private sector participation will take time and will call for
appropriate policies. Energy investment has to compete for funds which might equally
well be devoted to other sectors. The conditions in the energy sector need therefore to be
right to attract the necessary capital. Most investors require a return related to their
perceived risk. If they do not see that being achieved in the energy sector, they will invest
elsewhere. Risks faced by investors in many energy projects are high, and are changing.
Investment has flowed in the past. For it to continue to flow in the future, financing
mechanisms need to be in place, investment returns need to be high enough and
investment conditions must be appealing.
Source: IEA World Energy Investment Outlook, IEA 2003.
Proposed reforms and their assessment
Reform plans have been under discussion for several years. The Mexican government
is conscious of the need for changes to sustain and develop a reliable electricity service.
The sector needs investment and modernisation.
A comprehensive reform package was tabled to Congress by President Ernesto Zedillo
and the PRI (Partido Revolucionario Institucional) in 1999, which involved strong market
opening and supporting Constitutional amendments. It included corporatisation of CFE
and LFC, the establishment of an independent system operator and separate transmission
monopoly, all generation apart from nuclear to be divested, and the development of a spot
market/bilateral contracts, as well a new regional division for generation and distribution
to create effective markets. But PRI lost its majority and the reform failed. Underlying this
political failure was strong union and general civic opposition to privatisation borne out of
previous experiences with bank and road privatisations, concern about the fate of large
current subsidies to residential consumers, and a general scepticism about whether
competitive electricity markets really do work, in the light of recent international
experience.
After the failure of the 1999 reform proposal, the government sought a modest
extension of the 1992 LSPEE law, to promote private involvement in the sector through
specific schemes, among them self-supply, strengthening the arrangements for the sale of
surplus from self-supply schemes to CFE. This amendment was challenged, and there was
an appeal to the Supreme Court. In their judgement which upheld the appeal, five
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members of the Court noted that the 1992 law -as well as other related laws – might be
unconstitutional. The law cannot be challenged directly (any challenge would have had to
be made within a year of its adoption) and existing arrangements within its ambit such as
IPP contracts are therefore probably safe. But the fact that it is almost certainly
inconsistent with the Constitution makes some in the government consider that any
further proposal to amend the law could be dangerous and backfire, unwinding the limited
market opening that is already in place, and possibly even endangering existing private
sector participation. This view implies that the only risk-free way to further market
opening is Constitutional change, however difficult and controversial that might be.
Constitutional change requires a two thirds majority in both chambers of Congress, plus
approval by a minimum of 16 out of the 31 States.40
Current reform proposals
Since 2002 at least ten reform proposals have been submitted to Congress, including
the proposal submitted by President Vicente Fox in August 2002. At least half propose
comprehensive changes with or without Constitutional amendment, and the rest propose
minor changes.
Of the reforms that propose comprehensive changes, one set aims broadly to
strengthen State control, reinforcing CFE and LFC as integrated monopoly companies but
giving them greater management autonomy on the grounds that this would enable them
to make necessary infrastructure investments. Private parties would play a carefully
restricted and complementary role.
The other set – of which the President Fox proposal is one – aims at a careful balance
between private and public participation. They seek to reinforce electricity public service as
a State activity, but at the same time to strengthen and broaden private participation
(demand as well as supply) by disaggregating the supply chain, so as to put the State sector
under competitive pressure to improve efficiency and quality. All the reform proposals can
be said to share a common core: no privatisation, the State to remain sole provider of public
service (though definitions, crucially, vary), CRE to be strengthened, CFE and LFC to be given
greater management autonomy, and the need for private participation to complement public
investment. But diversity of views on the way ahead is still uncomfortably large. For example,
some would put restrictions on the current very limited arrangements for private
participation and turn their backs on reform aimed at stimulating competition in electricity
supply. The appointment of a new Energy minister, Mr. Felipe Calderón, in late 200341 has led
to further efforts to find a compromise that could be accepted by Congress.
The President Fox reform proposal
The President Fox reform proposal is considered below.42 Its aim is “to provide legal
certainty for a much broader measure of competition than exists today, and to define clearly
those activities for which the State will retain exclusive responsibility and those which will be
open to the private sector”. The government wants to ensure that CFE and LFC have adequate
resources for investment, but also wants to promote more private sector involvement and
open the sector to competition. It seeks a transformation of public institutions and the
coexistence of public and private companies. The proposal both confirms the current scope for
private participation and aims to enlarge it through the creation of direct market competition.
It is however not as strong as the 1999 proposal in terms of promoting competition. Notably
the 1999 proposals covered the divestiture of generation assets, which is not included in the
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President Fox proposal (President Fox declared at the start of his Presidency that there would
be no sale of public assets). The proposal covers changes to Articles 27 and 28 of the
Constitution, and changes to related laws such as the LSPEE.
The proposal is the subject of ongoing debate and adjustment, as are the other reform
proposals, submitted by the other major political parties.
Constitutional change
The proposal includes amendments to the Constitution, aimed at removing any legal
doubt over private sector participation in electricity supply and broadening the scope for a
competitive market based on bilateral contracts between consumers and suppliers, and a
power exchange. Constitutional change is proposed because a further attempt to achieve
these aims by amending the 1992 law risks another challenge. A proposed amendment to
Article 27 states that the supply of public electricity service (a less exhaustive definition than
the current one) is exclusive to the State, but that private providers may generate electricity for
their own consumption and for that of the State, and may also generate and supply electricity
for large users (usuarios calificados), defined in amendments to related legislation to have an
annual consumption over 2 500 MW. The Constitutional amendment also guarantees non
discriminatory access to, and use of, the grid. A proposed amendment to Article 28 adjusts the
existing text to say that the public electricity service (again, more restrictive than the current
reference to “electricity”) will not be considered a monopoly activity.
Given that Mexico expects to rely on private investment for nearly all of the very
significant generation capacity needed to meet rising demand, any legal uncertainty over
the current regime which allows IPPs to invest needs to be clarified. By the same legal token
the proposed amendment appears to be the only way to introduce a measure of direct
competition to CFE and LFC into a market which currently has none, given the way the
Constitution is currently framed.
The qualified user limit of 2 500 MW is a high level of consumption, and many such
consumers are likely to need electricity on a continuous and stable basis for their own use
(in a production facility for example), for which they could arrange a long term contract
with generators or become self suppliers. In other words the limit may, in practice, not
drastically change the competitive landscape for CFE and LFC, and is only a minor step
forward for the development of a fully competitive market in which electricity may be
traded wholesale (via a power exchange) as well as at the retail level. This requires a critical
mass of buyers and sellers,43 sufficient to avoid problems of market power and the
potential domination of CFE (currently owner of 74% of Mexico’s total generation capacity)
in the future power market. It is also not clear how difficult it would be at some future point
to amend the definition of large user (the term “large user” being in the proposed
Constitutional amendment, though the specific definition would be in a primary law).
All that said, the proposed Constitutional change would still be a big step forward for
Mexico relative to its current position of legal uncertainty and absence of any framework
for direct competition.
Four key laws would be amended, or replaced with new ones. They are the Ley
del Servicio Público de Energía Eléctrica (LSPEE); the Ley Orgánica de la Comisión Federal
de Electricidad (CFE law – new); the Ley del Centro Nacional de Control de Energía (CENACE law
– new); and the Ley de la Comisión Reguladora de Energía (CRE law). Together with the
Constitutional amendment this would give rise to the changes examined below.
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Electricity public service
An amended LSPEE rounds out the new Constitutional definition. Electricity public
service is defined as a “set of activities performed by the State, through decentralised
entities, in a continuous, uniform, regular and permanent way, in order to supply
electricity that has as its purpose the satisfaction of basic collective needs”.
The potential interpretation of what is covered by electricity public service remains
very broad and crucially, public service remains the direct responsibility of the State. For
electricity as for other services such as telecommunications, public service in many OECD
countries today is approached rather differently. A crucial distinction is usually made
between the definition of public service and the means of its delivery, which can be private,
in which case private entities may be put under an obligation to deliver public service or at
least to make a financial contribution to its cost. Public service is also likely to be defined
more narrowly and precisely: for example, as the provision of basic services at affordable
rates to residential users.
Transmission grid and system control
The proposal (some elements are unclear) is to implement a two stage transformation
of the system operator CENACE (Centro Nacional de Control de Energía), currently embedded in
CFE, into a new decentralised public entity (organismo público descentralizado) independent
of CFE, though still State-owned. At the end of this process, CENACE would be wholly
independent of CFE and would have two main roles. It would be the system operator,
controlling and dispatching power over the grid (system operation rules would be proposed
by CENACE and approved by CRE). It would also be grid manager, with responsibility for
ensuring open and non discriminatory access to the grid. CFE and LFC’s grid assets would
come under its control. CFE and LFC would be required to provide grid access to generators,
self suppliers, cogenerators and registered users when ordered by CENACE. CFE, LFC, other
generators, self suppliers, cogenerators, and registered users would all be able to buy and sell
electricity via CENACE’s system operation. Tariffs for grid access would be set by CRE, based
on efficient economic costs to cover network expansion needs. CENACE would be entrusted
with an overall responsibility to optimise installed capacity, to minimise the global costs of
electricity public service provision, to determine the actions needed for the system’s security,
reliability, maintenance and design, and to coordinate generation, transmission and
maintenance programmes. CENACE’s board would consist of SENER and advisers appointed
by the Presidential executive.
The changes, crucially, are proposed in two steps. In the first step CENACE’s accounts
would be separated from those of CFE and LFC. Until 2006 when full independence would
allow a real market to develop, generation plants would have to bid their energy at
marginal cost (audited by CRE) plus ancillary services and a scarcity element probably
based on VOLL (Value of Lost Load).44 CENACE’s full independence as a separate entity
would only come in 2006, or when 12.5% of total generation is bought by large users.
This part of the change goes to the heart of the new framework for electricity supply. If
Mexico is serious about introducing an effective framework for competition, grid management
and system control are probably the most important elements to get right. Different OECD
countries have implemented different approaches, depending on their attitude toward basic
issues, notably the extent to which they may be prepared to restructure a vertically integrated
incumbent. Box 5.5 sets out the three main models adopted around the OECD.
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Box 5.5. Grid management and system operation:
three different approaches
Full vertical integration of the electricity supply chain was the dominant model for the
electricity industry worldwide until the 1990s. It had the merit of simplicity in terms of
unifying the roles of planner, owner, and system operator, and of providing incentives to
invest. But it was increasingly questioned because of the lack of incentives to maximise
efficiency. Notably under this system, investment costs, operating costs and labour
productivity may be less than optimal. Investment may be made but is it unnecessarily
costly? And are the costs of inefficiencies passed through to consumers via higher prices
(which may in turn trigger cost-distorting subsidies to consumers)? The use of regulation
to promote efficiency and to limit cost pass-through has a limited impact, not least
because of information asymmetries between the regulator and the regulated firm(s), and
the risk of regulatory capture. Competition and trade bring greater pressure to bear than
regulation can on its own.
Broadly, three approaches have been developed to restructure the central functions of
the electricity supply chain – transmission and system operation – for competition. The
approaches reflect differences in the extent to which countries may be prepared, or able,
to unbundle existing vertically integrated electricity supply. The leading role in grid
management and system operation can be taken by a vertically integrated transmission
company, or a transmission company that owns and operates the network, or it can be
shared between an independent system operator (ISO) with some planning responsibility
and a number of transmission owners.
The vertically integrated generation and transmission owner/system operator
Under the first approach transmission and generation are vertically integrated and
companies perform all transmission-related activities (including system operation). They
own and operate the grid and are responsible for planning and developing the system (with
the approval of, or together with, other relevant authorities). Separate accounting for these
activities is the minimum requirement in countries which have adopted this approach, but
in many cases a transmission subsidiary is established, to separate management and
employees from the rest of the company. An example is France’s electricity grid, managed by
a subsidiary (Gestionnaire du Réseau de Transport – GRT) and owned by EDF. The ministry is
closely involved in governance, development and investment issues.
Maintaining a vertically integrated approach under competition is problematic because
the transmission owner/system operator may discriminate against competitors in grid
access and system dispatch. It can also make “strategic” investment in grid expansion that
may put competitors at a disadvantage. Accounting and management separation of grid and
system operation activities, as well as the significant involvement of a strong regulator as
well as the competition authority, can help to minimise the risks but not eliminate them.
The independent transmission owner/system operator
A second approach involves setting up a separate transmission company with no
interest in generation, which owns the transmission assets and operates the system. An
example is England and Wales which has set up the National Grid Company (NGC) on this
basis. The regulator (Ofgem) sets a maximum allowance for capital expenditure on the grid
to limit investment costs and to provide incentives for cost efficiency.
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Box 5.5. Grid management and system operation:
three different approaches (cont.)
The transmission company approach probably offers the most balanced compromise
between streamlined planning (the advantage of the old system) and allowing competition
to emerge. Generation is unbundled, thus securing competitive neutrality in grid access. At
the same time, grid related activities – planning, operation, investment and maintenance –
are conducted within an integrated framework. This facilitates effective management of
the trade-offs between short term system operation and network access, and long term
investment and planning.
The independent system operator
Under the third approach, used by some US markets among others, the ownership of the
grid is separated from its operation and an independent, not-for-profit system operator
(ISO) is created, the aim being to allow for a dispersed ownership of transmission assets
and a decentralised development of the network, without forcing generators to divest their
transmission assets (it also reflects the fact that system operation is always a monopoly,
whereas transmission lines are not natural monopolies and may be duplicated). This
approach opens grid investment to third parties, pays market prices to grid owners, and
places the grid assets under the control of the ISO.
The ISO approach may be the best approach where joint ownership of generation and
transmission needs to stay in place (for example in the US, private ownership of electric
utilities makes separation difficult). It has the merit of allowing investment in the grid by
third parties. But governance structures are an issue because the ISO makes crucial
decisions about the system without any corresponding financial stake in the grid, and a
way needs to be found of ensuring that it has the incentives to manage the system
effectively (ISOs are not-for-profit and there is no clear owner), and that third parties have
the incentives to invest in a grid which is managed by someone else.
Source: IEA Security of Supply in Electricity Markets, IEA 2002.
Very broadly, the first step of the President Fox proposal corresponds with the first
approach and the second step with the second. It is understandable that Mexico may be
looking for a transitional approach to the introduction of competition, but the first step as
currently conceived is likely to raise major problems. The proposal envisages accounting
separation only, not management separation, and a strong regulator is not yet in place to
ensure that CFE respects the rules in this regard. Also, Mexico is not part of a wider regional
electricity market, as for example EDF is part of the EU’s single market, which would
provide immediate competitive threats to CFE and pressures to improve its efficiency. The
history of the telecommunications sector is not an encouraging example for electricity.
Separation of activities
The initial separation of system control and grid management from CFE and LFC is
extremely weak. Accounting separation from CFE’s other activities is the weakest form of
separation (Box 5.6). OECD countries that have followed this path45 have generally opted
for a stronger management separation.
Real change to enable effective competition to CFE and LFC is only likely to come with
the complete separation of CENACE from CFE in 2006. Meanwhile CFE can be expected to
remain effectively in charge of system operation, with both the incentive and the
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Box 5.6. Dealing with vertically integrated utilities in the network industries:
accounting separation
The 2001 OECD Council Recommendation
The 2001 OECD Council recommendation on structural separation in regulated industries
addresses the need to separate potentially competitive activities from regulated utility
networks, as well as the need to guarantee access to essential network facilities to all market
entrants on a transparent and non-discriminatory basis. It notes that incumbents, in the
absence of antitrust or regulatory controls, have both the ability and the incentive to restrict
competition, and that this generally harms efficiency and consumers. They can, in particular,
cross-subsidise competitive from non-competitive activities. Commercially sensitive
information can also be made available between different company activities, which can
advantage the incumbent’s competitive activities relative to those of other players.
The OECD Council recommends that “member countries should carefully balance the
benefits and costs of structural measures against the benefits and costs of behavioural
measures” to achieve this. Behavioural measures means regulation aimed at controlling
the ability of an integrated firm to restrict competition (incentives to restrict competition
remain). Structural measures aim to separate the monopoly from competitive activities,
the weakest form being accounting separation and the strongest divestiture (separating
the management of different activities, into autonomous subsidiaries for example, goes a
step further than accounting separation). The benefits and costs to be balanced include the
effects on competition, effects on the quality and cost of regulation, the transition costs of
structural modifications and the economic and public benefits of vertical integration,
based on the economic characteristics of the industry in the country under review. The
benefits and costs to be balanced should be those recognised by the relevant agency(ies)
including the competition authority, based on principles defined by the member country.
Accounting separation
Accounting separation is the weakest form of separation. It can reduce the ability, but
not the incentive, to discriminate, and this only if it is implemented effectively. To be
effective in relation to discrimination, it needs two essential ingredients. The first is a
strong independent regulator with the authority, powers, resources and expertise to
enforce effective separation. The second is a requirement on the incumbent to provide
clear and precise accounting information. Accounting rules need to show the cost basis for
activities and charges such as grid access charges, and also to demonstrate that there is no
cross subsidy of competitive or potentially competitive activities with monopoly activities.
Guidelines for “regulatory” accounts
A group of European telecoms regulators has set out guidelines for the preparation of
regulatory accounts, noting that “financial information prepared and published for
regulatory purposes often differs significantly from other financial information prepared
by companies for statutory or other purposes” and that “the basis on which regulatory
accounts are prepared requires special regulatory rules as well as the application of
generally accepted accounting practices”. They also note the value of procuring an
independent audit opinion on the accounts, which enhances the quality, objectivity and
credibility of the information presented. Their regulatory accounting guidelines, which are
equally relevant to the electricity sector, are as follows:
●
Regulatory accounting principles. These principles should establish the key doctrines to
be applied in the preparation of regulatory accounting information. They should include,
inter alia, the principles of cost causality, objectivity, transparency and consistency.
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Box 5.6. Dealing with vertically integrated utilities in the network industries:
accounting separation (cont.)
●
Methods for attributing costs, revenues, assets and liabilities. A description of the
attribution methodologies used to fully allocate revenues, costs, assets and liabilities,
should be given.
●
Basis for transfer charging. A description of the basis used to transfer charge between
different parts of the entity should be given, as required under the accounting separation
rules. Typically this will prescribe methodologies for ensuring that an entity charges itself
on the same basis as other entities for similar services.
●
Accounting policies. These should follow the form used for the preparation of standard
statutory accounts and should include, for example, details of fixed asset depreciation
periods. Where the regulatory accounts are prepared on a current cost basis, the basis
on which the assets are valued should be included.
●
Long run incremental cost (LRIC) methodologies. IF LRIC applies, a description of the
methodologies used to prepare long run incremental cost information should be given.
It should include details of the identification and treatment of shared or common costs.
opportunity to discriminate in system dispatch in favour of its own generation, as it will be
difficult to ensure effective regulation of generation bids into the system. Grid access is
also likely to be difficult. In the first stage, as with system operation, accounting separation
is likely to mean continuing effective control by CFE and LFC of the grid, and problems for
other players in gaining access to the grid.
The second stage of the President Fox proposal is an altogether stronger approach,
which avoids many of the pitfalls of continuing vertical integration. The first stage is
unlikely to give potential investors the confidence to invest. Mexico needs further firm
private sector commitments to invest in generation before 2006. If there is to be a two stage
process for introducing competition, the timetable should be accelerated or even better,
the second stage should be implemented immediately.
Interconnection and grid access charges
The regulation of grid access and use is a little unclear under the second stage. It
appears to be an ex post system under which CRE has the power to order CFE to make
agreements with other players based on a methodology which it has put in place,
presumably once negotiations have failed. The general OECD experience to date on what
works for effective grid access is that ex ante regulation is necessary46 to avoid protracted
and often unsuccessful negotiations which can put off new market entry. What are the
sanctions for non-compliance?
Grid access charges also need clear and careful regulation. The apparent continuation
of the aprovechamiento system implies a form of rate of return regulation. To be effective,
this form of regulation requires an objective and clear determination and valuation of the
asset base. What methodology will be used to identify and value the asset base? A
calculation of the regulated return on investment will also be needed. Neither of these
exercises is easy.47 Nevertheless they must be attempted. The right balance between low
network charges to encourage market entry and grid access, and returns that will stimulate
efficient, timely network investment, also needs to be struck. The current OECD trend is to
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strengthen incentives for cost efficiencies, and reduce inefficiency-related network losses
via locational marginal prices. Whichever approach is used, the regulatory framework
needs to be robust, transparent and credible, and participants with a financial interest in
the outcome should not be involved.
Tarification and subsidies for the public service
CRE would set the tariffs for electricity public service jointly with SHCP, based on
“economic efficiency criteria” that take account of infrastructure investment needs. The
Federal government may continue to subsidise consumption but how this would be done is
not clear. It seems that a form of the current aprovechamiento system would continue.
The tariff proposals are vague48 and raise several issues. They may be expected to fall
short of meeting economic efficiency criteria and the need for cost recovery, which are
important for the development of a competitive market as well as future investment. The
current subsidy system, if it continues, also distorts CFE’s budget, making it difficult to
determine costs, and cutting across any rational arrangement for covering needed
investments. The proposals do not spell out the tariff methodology to be applied: this
would be agreed by SENER, CFE, and SHCP, with the final decision taken by CRE. CFE starts
from a position of strength in these discussions because of its quasi-regulatory role in the
current framework and the relative lack of information available on costs. Effective tariff
regulation is needed to prevent ex-monopoly incumbents from making monopoly profits.
But it also needs to provide adequate incentives for investment.
Mexico is far from unique among OECD countries in facing an issue with the regulation
and subsidisation of end user tariffs under reform. The experience of other OECD countries
is that end user prices are not usually liberalised overnight, but that regulation continues to
be applied to the prices charged by the incumbent to protect consumers against abuse in the
initial stages of market opening. Subsidies may also take some time to unwind, and may not
disappear altogether, if an important policy goal is, for example, to support poor consumers.
As far as possible, a distinction should be made between price regulation for general
consumer protection in the transition to competition (and perhaps beyond), and subsidies
aimed at helping especially vulnerable groups. As regards price regulation for general
consumer protection in the transition to competition, it is important not to set prices too low
as this may discourage market entry. If subsidies are to continue, they should be direct and
transparent, for example formally approved by Congress and identified in electricity bills.
Instead of being integrated with CFE’s budget they should be part of the general budget, or a
budget specifically allocated for social purposes. The devolution of subsidy arrangements
(whilst ensuring that they remain transparent) to state or even local level is another option.
The framework for regulatory oversight needs careful management. Many OECD
countries have chosen to vest tariff setting in an arrangement that combines both the
regulator and an oversight ministry. A typical approach is for the regulator to propose
tariffs to an oversight ministry and for the ministry to approve them; the regulator may
make its proposals public. This seeks to keep a balance between the policy maker and the
regulator which reflects the fact that regulators are not directly accountable for their
actions and need constraints on their powers.
The proposal follows this tested approach. But it differs from many other OECD
arrangements in that the oversight ministry is the Finance ministry, rather than a policy
ministry. If the Finance ministry, which is the owner of a State entity, also has a regulatory
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responsibility for it, this generates a potential conflict of interest. A key objective of
regulation is to secure competitive neutrality, but a key objective of ownership is to
maximise profits. SHCP is likely to be faced with this dilemma. In principle, it is best not to
put this function with SHCP, but to put it with SENER. But tariff setting also needs to be
vested in a regulator/ministry that has the power and independence to resist capture by
the regulated entity. The proposal therefore depends heavily on the strength of CRE’s new
status (see below), as well as Mexico’s own best assessment of the relative merits of SENER
and SHCP to manage the policy role appropriately without capture and without raising
policy conflicts.
Transparency is an important consideration whatever the route adopted: users should
be able to see clearly who is doing what, and have opportunities to comment.
CFE and LFC governance and financing
Limited corporate governance and financing changes are proposed for CFE and LFC.
CFE remains a State-owned decentralised Federal government agency.49 CFE’s governance
Board would remain roughly as it is now, made up of representatives of the Energy, Finance,
Environment and Economy ministries, plus four representatives appointed by the
Presidential executive, and three union representatives. Its “General Director” would be
appointed by the Presidential Executive.
It is not clear how much real change there would be to CFE’s financing arrangements.
Some critical issues such as taxation are not addressed in the President Fox proposal. CFE’s
budget would remain part of the Federal budget, but would be “ring-fenced” so that CFE
debt is no longer considered to be part of Mexico’s sovereign debt. The Board must
establish a “primary balance” between revenues received, and expenditure before interest
and tax. CFE would continue to pay a rate of return to the State on the State assets it uses
for the provision of electricity public service. CFE’s financial statements, externally
audited, would be made public. There would be accounting separation for CFE’s different
activities: generation, transmission and system operation (see above), distribution, and
activities outside provision of the electricity public service.
These changes appear to do little to alter the nature of the current relationship of CFE
with the government and the public budget. The existing governance and financial
structures need a radical overhaul to detach CFE and LFC from their embedded position
within the latter. Their current status makes it virtually impossible to establish the true
costs, efficiency, and productivity of the two companies with any accuracy, confuses
investment and subsidies, and does little to prepare the ground for potential competition,
both in terms of their own future role in a competitive market, and the role of competitors.
CFE and LFC need stronger management and financial autonomy, carefully bounded
by strong independent regulation and regulatory controls to ensure that they do not abuse
their new freedoms. The greater autonomy must go hand in hand with measures to ensure
competitive neutrality vis-à-vis potential competitors and an effective new corporate
governance framework (Box 5.7) and, not least, strong regulatory oversight.
Finally, a key issue is the setting of performance objectives for CFE and LFC. CRE would
set the “terms and conditions for public electricity service, based on CFE proposals”. This
lacks precision, and CFE should not be so closely involved. There should be a clear definition,
by the regulator, of objectives, systems for measuring performance, and the establishment of
managerial incentives for the efficient achievement of objectives.
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Box 5.7. State enterprises and competitive neutrality
If competition is to be introduced and sustained effectively in a market which includes a
State-owned incumbent, careful measures are needed to ensure that the latter does not
enjoy an unfair competitive advantage relative to private sector competitors, and in
particular, that the prices it charges fully reflects costs, to avoid distorted decisions on
production, consumption, and investment. Several OECD countries – including the
Netherlands and Australia – have set up competitive neutrality frameworks to address
these and other issues with an overall aim of promoting equitable treatment between
activities carried out by the State and those of the private sector. These frameworks, which
may set general objectives such as rules for conduct, can help to capture issues that may
not easily be identified in advance and which may emerge as competition develops.
Specific issues that need attention at the outset include
●
Initial balance sheet. The balance sheet of State entities at the time competition is
introduced affects their basic cost structure, and hence their competitive position in the
market. If assets taken on the books are substantially undervalued, and if debt and
equity positions do not conform with private sector norms, the State entity starts out in
a competitive market with a built-in competitive advantage over private sector rivals.
●
Pension and other liabilities. Pension liabilities appear to be a growing issue for CFE and LFC:
a lag in funding the pension funds is absorbing an increasing amount of their revenue.
●
Taxation. State entities may enjoy unfair tax advantages over competitors, if their tax
regime is not reformed prior to competition. Typically, State entities often start with
some tax exemptions.
●
Separation from the State budget. The budget needs to be transparent and ring-fenced,
so that the government does not have to choose between funding the electricity public
service and wider government interests.
●
Internal subsidies and cross subsidies. This means effective accounting separation, at
the very least (see Box 5.6 above), to prevent cross-subsidisation of competitive activities
(generation for example) out of revenues from non-competitive activities.
●
Rate of return on assets. State entities need to recover their costs fully, including an
appropriate rate of return on capital (neither too high nor too low).
●
State guarantees. State guarantees, meaning that the State is liable if the State entity
cannot meet its debts, lowers the risk attached to their borrowing compared with a private
company. State guarantees, explicit or implicit, should be unwound as far as possible.
The abuse of dominance provisions in competition law are very important in the context
of a State incumbent. As thresholds for triggering such provisions are usually set relatively
high, some competitive neutrality frameworks may set lower thresholds, and include
provisions for private parties to raise neutrality problems.
In telecommunications, the concept of “operators with significant market power” is
often used to underpin special regulation to constrain potential abuse of market power.
Principles for effective corporate governance*
The OECD Principles on Corporate Governance, endorsed by Ministers in 1999, are also
relevant to some extent for State-owned entities. The Principles include guidelines which
are grouped under five headings, of which the last three are the most relevant for Stateowned entities:
●
The rights of shareholders. The corporate governance framework should protect
shareholder rights to transfer shares, obtain information, vote, elect the board and share
in profits.
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Box 5.7. State enterprises and competitive neutrality (cont.)
●
The equitable treatment of shareholders. The corporate governance framework should
ensure the equitable treatment of all shareholders and the right of redress for violation
of shareholder rights.
●
The role of stakeholders. The corporate governance framework should recognise the
rights of stakeholders as established by law and encourage active cooperation between
corporations and stakeholders in creating wealth, jobs and the sustainability of
financially sound enterprises.
●
Disclosure and transparency. The corporate governance framework should ensure that
timely and accurate disclosure is made on all material matters regarding the corporation,
including the financial situation, performance, ownership, and governance of the company.
●
Responsibilities of the Board. The corporate governance framework should ensure the
strategic guidance of the company, the effective monitoring of the management by the
Board and the Board’s accountability to the company and the shareholders.
* These have been recently updated.
The regulator: CRE
The President Fox proposal makes virtually no changes to CRE’s formal status. CRE
remains an organismo desconcentrado, part of SENER.50 It would continue therefore to
negotiate its annual budget with SENER and SHCP as part of the government’s budget for
the executive (with the proposal however that the budget, once set, would not be subject to
any potential changes over the fiscal year as it is now). The current governance structures
(collegiate board, etc.) would be retained.
CRE’s powers and responsibilities would, however, be broadened and adjusted to the
new market conditions. Very broadly, it would be responsible for ensuring that all energy
acquisitions for providing public service are the most economically efficient for end users,
and for ensuring the transparency, fairness and non discriminatory conditions needed for
the development of public and private investment activities. Its specific responsibilities
would be to:
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●
set the terms and conditions for public service provision, including approval of the terms
for the development of the SEN, and terms and conditions for all generating capacity
expansion bids for the public service;
●
“regulate” CENACE, the system operator. This would include approving the rules for
system dispatch and operation;
●
set the methodology for calculating public service tariffs, as well as tariff rates;
●
regulate transmission for the public service and set the methodology for interconnection
charges;
●
set accounting conditions for the separation of transmission and distribution from other
activities, including the criteria for regulatory accounts;
●
operate (broadly as it does now) a permit system for private players (generators and
traders), providing services to users who are given a choice of supplier, as well as keeping
a register of these large users;
●
participate in setting efficiency and quality standards; and
●
enforce the rules and apply sanctions.
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The proposals for CRE go some of the way towards developing it as an effective regulator
with the capacities to manage the issues raised by the introduction of competition in
electricity (as well as its role of supporting the effective and efficient evolution of the public
service). Putting tarification regulation with CRE is a good move in the right direction,51 as is
the general responsibility for grid access. CRE needs to be a strong regulator, from the start
and not least under phase one of the President Fox proposal (if there were to be a phase one).
But the proposals do raise a number of issues which are likely to undermine CRE’s
effectiveness in practice. First, it seems that, absent any change of formal status, no clear
attempt is being made to strengthen its independence from sponsor ministries in terms of
budget, staff, and internal regulations governing its relationship with the ministries.52
Some of the proposals for its new powers and responsibilities are too general, and it seems
that secondary legislation (such as reglamentos) may be used to flesh out important points
such as accounting separation. This raises the danger that all-important secondary rules
may be ineffective as they are likely to be subject to a bargaining process that will dilute
their strength. Grid access and interconnection issues, and the issue of service quality
standards, as well as accounting rules, appear relatively undeveloped in this context. Last
but not least, powers to require and seek out information, enforcement powers and
sanctions appear weak or even non-existent relative to what would be needed to prevent
anti-competitive behaviour: there appear to be no proposals for change to the current
system of administrative sanctions.
Box 5.8 sets out some principles and issues for attention that are emerging from OECD
countries’ experience with independent regulators.
Box 5.8. Independent regulators in the infrastructure sectors
A marked feature in the development of liberalised infrastructure sectors over the last few
years is the rise of independent regulators. Although this is still work in progress, a number
of issues have emerged from the collective experience of OECD countries (see Chapter 4 for
more details). Independent regulators have proved to be an important step forward for better
regulation of infrastructure sectors (as well as for other very different areas such as civil
liberties) across OECD countries. They help to prevent political interference and the
influence of special interests, boosting market confidence that the entry of private capital
will not be vulnerable to uncertainly based, politically-driven future government decisions.
They can also be powerful advocates for further and more effective reform.
Their development is linked to the need to separate government’s policy making and
ownership roles from its regulatory role, to avoid conflicts and to promote competitive
neutrality in regulatory decision making. Independent regulators are a necessary institutional
development for marking out the separation of these different roles, which is especially
important in countries which have chosen to maintain a significant number of State-owned
enterprises. Independent regulators are important for ensuring non-discriminatory access to
essential facilities. Ex ante rather than ex post regulation has emerged as best practice here.
But independent regulators raise issues too. Their independence from ministers can be
weak. They are vulnerable to capture by the entities which they regulate as well as by the
political process. They need an adequate governance structure, resources and competences to
carry out their role and to enjoy an appropriate level of independence. Independence, however,
needs to be balanced with clear accountability mechanisms. This is especially important in
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Box 5.8. Independent regulators in the infrastructure sectors (cont.)
relation to parliaments: democratic legitimacy needs be reinforced given that independent
regulators are non-elected. The accountability “feedback loop” also needs to involve dialogue
with policy makers, and directly with citizens (for example through clear information on Web
sites). Evaluation mechanisms for regulators’ performance and governance structures need
attention too, balancing flexibility with the need for independence and credibility.
Speedy resolution of key issues is important for new market entrants. Appeals from
regulators’ decisions may be used by incumbents to delay important decisions for their
competitors. Appeal systems against independent regulators are needed, but the right balance
must be found to avoid the risk of undercutting their independence and effectiveness.
Independent regulators are often not covered by the requirement of having to apply
regulatory quality standards. Where regulators make rules or interpret them, they should
be under the same disciplines as for other rule-makers notably as regards RIA and
consultation. Sanctions and enforcement powers are essential for their effectiveness but
often not strong enough.
The relationship of infrastructure sector regulators with competition authorities is
important. There needs to be clarity of responsibility for competition issues. Cooperation
agreements are helpful and cooperation can extend further, to encompass joint projects
for the review of difficult issues. Other sought-after virtues of an effective independent
regulator are transparency, predictability and efficiency. Transparency is a key factor: all
stakeholders including consumers and the wider public need to be engaged.
The competition authority
The potential role of CFC should not be neglected. The role of the competition authority in
the reform of utilities and other sectors in other OECD countries has sometimes been central.
CFC has developed over the last few years to become a well respected agency. The competition
law vests CFC with the authority to engage in certain forms of competition advocacy. It may
address the competitive effects of proposed changes to Federal programmes and policies and,
at the request of the Federal Executive, it may comment on the competitive implications of
new laws proposed by the executive branch of Congress. In 1999 it advised that legislation
should include provisions assuring non-discriminatory access to transmission networks at
regulated prices and the cost-based pricing of services. It has already established a relationship
with CRE which might be developed further.
Natural gas market reforms
Fuel costs are an important part of the total costs of generation. The OECD country
reviews on regulatory reform highlight the importance of access to fuel sources as an issue that
is almost as important as third party access to the grid for new generators. Specific issues
raised in the reviews include the problems which can arise when access to fuel sources is
controlled by a firm that also competes in the electricity market,53 access to gas transmission
capacity, access to liquefied natural gas (LNG) terminals, and access to storage facilities.
Box 5.9 sets out the current structure and regulation of Mexico’s natural gas market.
Given the rapidly growing importance of natural gas as an input fuel for power generation
in Mexico,54 a successful electricity market needs access to natural gas on reasonable
terms. Investors will consider both the current and expected future cost of natural gas.
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Box 5.9. The structure and regulation of Mexico’s natural gas sector
Industry structure
State-owned Petróleos Mexicanos (PEMEX) dominates the natural gas market and retains
a strategic monopoly of upstream activities (exploration and production (E&P), processing,
and first hand sales – that is, the first sales og gas from national production by PEMEX to a
third party for its delivery in the Mexican territory). However the downstream market has
been opened. In a 1995 amendment to the Oil and Gas Ruling Law (Ley Reglementaria
del Articulo 27 Constitutional en el Ramo del Petróleo) under President Zedillo, private
participants may build, own and operate natural gas transportation, storage and distribution
systems, and may also import natural gas. PEMEX however remains the dominant importer,
and private players have focused mainly on distribution and associated pipeline transport.
An important competitor to natural gas in the downstream market is liquefied petroleum
gas (LPG) which is in the hands of long-established local companies.
Exploration and production
Mexico has a significant 15 billion cubic feet of proven reserves, but uncertainties over
this figure arise from the fact that there has been not been enough recent investment in
exploration. Only a small fraction is non-associated gas. PEMEX’s monopoly of exploration
and production, combined with the fact that it is heavily taxed by the government and
overburdened with debt, has severely constrained its investment in E&P activities over
recent years. Recent efforts have been made to encourage upstream private participation
through Multiple Service Contracts (MSCs) which are a form of public-private partnership.
But MSCs only apply to non-associated gas, and PEMEX keeps the production. It is
premature to assess the success of MSCs. Three contracts have been signed so far.
Imports
The Mexican natural gas market and high pressure pipeline system is linked with the US
market via nine interconnections which can either import or export gas. Imports have
risen sharply over the last few years (see Figure 5.11), mostly from the US, encouraged
in 1999 by the elimination of tariffs. Plans are underway to develop LNG import facilities on
both of the Mexican coastlines.
Storage
There is very little, natural or otherwise. Linepack (storing gas in the pipelines) and LNG
are used as storage.
Transportation
PEMEX owns 80% of the high pressure pipelines. There are no limits on PEMEX load in
the system. The PEMEX pipeline system is mainly linked to the Gulf of Mexico. Most of the
private pipelines are near the border with the US.
Distribution
The most important private participation in the gas market so far is in the low pressure
distribution and supply of natural gas through the establishment of local distribution
companies (LDCs). Six companies, mainly foreign, are in this market. However the
development of LDCs has not been easy, with fierce competition from the established LPG
players.
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Box 5.9. The structure and regulation of Mexico’s natural gas sector (cont.)
Regulation
CRE is the regulator. It has more significant powers over gas than electricity, reflecting
the greater market opening in gas, but also the different approach which has been taken to
the regulatory framework. Notably it regulates pricing. Private players who wish to build,
own and operate natural gas transportation, storage and distribution system, or to import
natural gas, must first obtain a permit from CRE. PEMEX must also apply for a permit from
CRE for these activities.
CRE has powers to issue general provisions (directives) which set out detailed rules for
PEMEX and private participants, building on the provisions in the Oil and Gas Ruling Act.
Key directives include the 1996 Price and Rate Determination Directive for Natural Gas
Regulated Activities which establishes the methodologies and criteria that PEMEX and
permit holders must apply to determine prices and rates, as well as the information that
must be submitted to CRE, among other issues; the 1996 Accounting Directive for Natural
Gas Regulated Activities which establishes general accounting principles for PEMEX and
permit holders; the 1996 Geographic Zone Directive for Natural Gas Distribution which
establishes the general procedure used by CRE to determine geographic zones for natural
gas distribution.; and the 2003 Directive on Insurance of Natural Gas and Liquid Petroleum
Gas by pipelines. This Directive sets guidelines for the acquisition of insurance for third
party liabilities incurred by the permit holder.
CRE also regulates PEMEX’s first hand sales and prices, using a price cap (RPI-x) methodology
and the southern US market to which Mexico is connected as an international reference point,
and including the cost of transportation in Mexico. The aim is to “reproduce the conditions
that prevail in a competitive market and determine the price of natural gas based on its
opportunity cost”. The 2000 Natural Gas First Hand Sales Directive establishes the criteria and
procedures to be followed by PEMEX and its subsidiaries for first hand sales. Underlying
principles are transparency and balance in the contractual relationship between PEMEX and
natural gas buyers; ensuring that PEMEX does not impose unilateral or discriminatory
conditions; and the establishment of reciprocal conditions between PEMEX and natural
gas buyers.
For natural gas transportation, storage and distribution tariffs, CRE applies incentive
regulation. It determines the maximum revenue for each permit holder and type of service,
based on cost of service, and adjusts this every five years, following a review process that
evaluates performance and checks that goals set out in the Business Plan submitted to CRE
at the start of the five year term have been fulfilled.
CRE also regulates LPG first hand sales, transportation and distribution through pipelines.
It applies official Mexican standards (NOMs) to the industry.
In the short term, issues with current gas market regulation which are likely to be
constraining a more competitive downstream gas market need attention. Although CRE’s
regulatory powers are stronger than for electricity, there are nevertheless points that are likely
to need attention. The effective regulation of pricing for PEMEX first hand sales is constrained
by the fact that the accounting separation required of PEMEX for its competitive activities is a
weak form of separation, and CRE does not have adequate powers to require relevant
information of PEMEX. Internal PEMEX costs, essential for effective pricing regulation, are
therefore likely to be less than clear. Third party access to the PEMEX grid has also been
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constrained because CRE has not yet deployed its powers under the 1995 law to establish
regulated access, so private parties have had to negotiate with PEMEX. A regulatory framework
for this is now in the course of development. There are also disincentives to build new
pipelines because spare capacity cannot easily be traded.
For the longer term, in order to ensure continuing supplies at reasonable cost as well
as security of supply, Mexico’s rapidly growing dependence on imports should be reduced,
by reviewing the effectiveness of the current regulatory and governance framework for the
upstream gas sector, and public/private investment schemes (such as the recently
launched multiple service contracts (MSCs), in terms of their success in encouraging more
investment in the exploration and development of Mexico’s own reserves). Although its
cost is coming down, LNG is still an expensive form of natural gas, and imported US piped
gas is becoming increasingly costly as US reserves diminish. Imports are helpful in terms
of putting competitive pressure on the domestic market but should not be the whole
answer for securing a positive long term future for Mexican gas in power generation.
Other important issues on the path to reform
Communication of reform: engaging all stakeholders
Effective communication of reform plans and objectives is an essential part of the
reform process (Box 5.10), but one which many countries do not manage effectively, often
because no clear communication plan is developed. Regulatory risk is one of the issues that
investors weigh up in deciding where to invest: they look for stability, transparency and
predictability. The Mexican government has not yet put in place a comprehensive
communication strategy for reform of the electricity sector. This is perhaps not surprising
Box 5.10. Communicating electricity reform
Effective communication of electricity reform is complex, sensitive, takes time, and
ideally requires forward thinking and a strategy. The details are often technical and
complex. These are important for certain stakeholders such as market players, but the
broad picture, objectives and expected results also need to be laid out for users and the
wider public. Although this is a highly country specific issue, guidelines for an effective
approach include:
●
An open and transparent process that facilitates the integrated development and
implementation of reform. The process should provide for clear communication with all
relevant stakeholders in relation to specific implementation details as well as the broad
picture. Information should not stop at proposals for reform, but should seek to keep
stakeholders informed of developments and results.
●
Appropriate stakeholder consultation and participation in the design, development and
implementation of specific elements of the package.
●
Appropriate transitional arrangements which take account of potentially vulnerable
parties, addressing their concerns clearly and directly. Current market players, consumers
and employees need special attention.
●
Allowing sufficient time to develop and implement the different elements of the reform
package. Realistically this should be counted in years rather than months.
●
Ongoing government leadership to ensure that important stages in the reform path are
not unduly delayed and that potential “roadblocks” are addressed quickly and effectively.
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given the fluidity of the current situation, and the fact that some aspects of the different
reform proposals are incompatible. The government is currently consulting with the CFE and
LFC unions, and with academics. Whatever the final decisions on the direction and details of
reform, communication (if not consultation) should extend to other groups, including the
general public. For example, it would be beneficial if consumer organisations such as the
consumer protection federal agency (Procuraduría Federal del Consumidor – PROFECO) were
more closely involved. All levels of government need to be engaged (not just Federal but also
state and local levels). Although the management and regulation of the electricity sector in
Mexico is a federal responsibility, important issues of siting for new facilities are picked up at
the sub-federal level, and more broadly, all electricity consumers (not just those in the
Federal District of Mexico City) need to be kept in touch.
Mexico faces a particular communication challenge in terms of making the
connection between electricity reform, and its positive expected benefits in relation to the
much broader issues of government finances, the urgent need to make public investments
in the country’s social infrastructure, and the competitiveness of the economy. This wider
perspective on reform is rather distant from the ordinary consumer’s concern for a cheap
and reliable electricity service, and for the future of subsidies, against a background in
which half of the Mexican population lives below the poverty threshold. The limited 2002
adjustments to the tariff system were deeply unpopular,55 despite the fact that the
government was seeking to unwind the regressive nature of the current system (in other
words protect the poorest consumers and reduce subsidies to the richest). The government
should not miss opportunities of communicating the fact that it is seeking to protect the
poorest consumers.
Substantial support for an effective communication strategy can be provided by the
application of regulatory quality principles (see Chapter 2). The consistent and effective
application of Regulatory Impact Analysis (RIA) promotes transparency, clarity of
communication, and the engagement of relevant stakeholders, as well as a more coherent
view of the different elements of reform and a better assessment of whether proposed
regulatory changes will meet underlying policy objectives.
Current private participants in the market: clarifying their position
If Mexico moves toward a market with direct competition, this raises the issue of how
existing players who came into the market under the 1992 LSPEE arrangements will fit. The
issue is especially important for IPPs and for CFE, the exclusive purchaser of power generated
by IPPs via long term power purchase agreements (PPAs). The core problem which needs to
be addressed in a reform plan is stranded costs. The OECD’s country reviews of electricity
sector reform suggest that incumbent operators and generators are not always favoured
relative to their new entrant rivals. For example, long term contracts which commit the
incumbent to purchasing key inputs at what turns out to be above-market prices can leave
the latter at a disadvantage. Equally, it can work the other way round, and incumbents may
find their power purchasing is below market prices, giving them a competitive advantage
over new entrants. In either case, the level playing field for competition is distorted. Several
OECD countries have made arrangements for compensation.56
Infrastructure siting: promoting regulatory clarity and simplicity
Siting for energy facilities including generation plants and transmission grids is a major
and growing issue for most OECD countries. Mexico appears to be no exception. For example,
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a project to site a major new LNG terminal in Baja California is being resisted at the state level
and may be built instead in the US. There may be good reasons for opposing this particular
facility. But Mexico should seek to ensure that procedures do not unduly complicate the siting
of new energy infrastructure. This means a clear, credible and not over-complicated regulatory
framework, ensuring that the administrative process for construction permits is streamlined
as far as possible without jeopardising other regulatory concerns (such as compliance with
safety and environmental regulations). As these issues are picked up at the different levels of
government in Mexico, the engagement of all levels is important. This may need review as it
appears that several permits are needed at the different levels of government for many
issues.57 Regulatory coordination agreements which are already in place between the Federal
government and the states and municipalities could be used.
Demand management: developing policies to promote this
The importance of demand-side management to complement the supply side of
electricity provision has traditionally been somewhat overlooked in most OECD countries.
It requires a mix of policies to reduce electricity intensity (the amount of electricity
consumed per capita), by improving energy efficiency and conservation. Users should
wherever possible be encouraged to manage their own demand needs, and it is
encouraging to note that Mexico is taking steps in this direction for large users. An IEA
study58 notes that measures to improve demand response can yield a significant reduction
in electricity demand, as well as helping to smooth the regular peaks in demand of
traditional electricity systems, and offering real financial savings to users. It also notes that
in order for demand response measures to be effective, not all users need to be exposed
and respond to real cost prices.
A transitional option for reform
If it proves difficult to move to direct competition at this stage because of Constitutional
difficulties, a great deal can be done without Constitutional change to improve current
regulatory and governance arrangements and promote a more efficient electricity sector.
These measures could involve three sets of reform or action, as defined below.
Regulatory and corporate governance changes
The following mutually interdependent measures can be taken (they are also needed
for a successful move to direct competition):
●
Strengthening CRE’s role as the sector’s independent regulator.
●
Setting up a new system for end user tariffs based on cost recovery, separating subsidies
from tariffs, and ensuring that the new systems are fully transparent.
●
Improving the corporate governance framework for CRE and LFC so as to allow them
scope for more effective financial management separate from the State budget.
●
Setting up management separation of CRE and LFC’s different activities in the electricity
supply chain, especially as regards system operation and grid management.
Single buyer
Adjustments could be made to the IPP system. Mexico’s current model for its
electricity sector is the basic IPP model, under which independent generators may only sell
to CFE, and the two incumbents CFE and LFC have a complete monopoly over all final
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customers. The only competition is therefore competition to build plants and operate
them, and even that process currently involves CFE rather too heavily. The prices at which
IPPs sell their power do not reflect their cost of service, but rather the long term contract
price which emerges from the initial selection process for an IPP.59 This price is then
passed through to end consumers via their tariffs. Market risk, technology risk and credit
risk is thus passed on to consumers. These are all good reasons why direct competition is
preferable in the end. The basic IPP model can, however, be improved and developed
further, without stepping over the line to direct competition. Two elements in particular
can be developed:
●
First, a fully competitive and independently managed bidding mechanism for new
capacity can be set up. An independent entity would collect bids for new generation,
oversee the whole process and make the final decisions. The entity could either be the
regulator or the central system operation part of CFE which had been effectively
separated from generation and supply (through management separation, at least), or
possibly both. This would be a significant step forward from Mexico’s current approach
which gives a defining role to the vertically integrated incumbent CFE in the process of
selecting new private generating capacity. An independently managed tendering process
would provide incentives for cost efficiency in the selection, construction and
management of generation plants.
●
Second, a framework could be set up under which three way or triangular transactions,
involving a “Single Buyer” and two other players (a private generator and a client for the
purchase of power) may take place. The Single Buyer manages the transaction for the
client: buying the power from the generator chosen by the client, transmitting it, and
selling it to the client. This would offer some limited scope for improving general market
efficiency. As with the vertically integrated incumbent which it would replace, there is
no day to day competition among generators and there are no external (market)
incentives to set retail prices to the client efficiently, but strong regulation could promote
pricing that secured cost recovery.
The early EU legislation for electricity market opening provided for a Single Buyer
approach under which eligible customers are free to conclude supply contracts with
generators or suppliers both inside and outside the incumbent utility’s territory. Under this
system the Single Buyer is obliged to purchase the electricity from the independent
generator and sell it to the eligible customer. The Single Buyer purchases the electricity at
the price negotiated between the customer and the competing supplier and sells it on to
the customer at its own sale price offered to eligible customers, minus a tariff for grid
services. The grid services tariff must be non-discriminatory.60 The Single Buyer can refuse
a transaction on technical grounds, for example because it lacks the necessary grid
capacity, or because it would interfere with public service obligations. An effective dispute
resolution mechanism therefore needs to be in place.
This approach is a possible option for Mexico prior to the introduction of direct
competition. For it to be worthwhile, the Single Buyer would need to be as independent as
possible from generators and customers. In particular the Single Buyer, if it emerges from the
original vertically integrated incumbent, should as far as possible be insulated from any
incentive or opportunity to favour the incumbent’s generators. A system operator/grid
manager, if it is properly detached from other CFE activities, and overseen by a strengthened
CRE, could take on the Single Buyer role. Otherwise this option is not worth considering.
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A yet more advanced model could overcome some of the drawbacks still inherent in
having a Single Buyer of the kind which has just been defined.61 A mandatory competitive
power pool can be established under the management of the independent system operator.
The private sector makes decisions about new generation capacity, and the pool agreement
and market rules replace power purchase agreements. Generators are not shielded from
market risks by government guarantees, and wholesale prices respond quickly to changes
in demand and supply. It is also relatively easy to allow generators from neighbouring
countries to sell into and purchase from the pool. This approach removes much of the
awkwardness and risk of discrimination inherent in having a Single Buyer. But it remains
risky in terms of the government’s potential capacity to intervene in system dispatch so as
to favour particular generators. In other words it relies heavily on a system operator that is
both independent of the incumbents and of the government itself.
More broadly, there is an obvious danger that taking the route of developing an IPPbased approach could indefinitely delay a further step toward direct competition. This
transitional option therefore needs very careful assessment if it is to be used.
Public investment through bond issues
If publicly financed investment continues to be necessary, it is very undesirable to fund
this out of current tax revenues, which are low and needed for other public investments.
Raising finance through bond issues is a better option. Although this does raise public debt,62
investors should be able to make the distinction between bond offerings intended to finance
the gap between current revenue and current expenditure, and those intended to finance
capital expenditure in a revenue-generating industry. Bond issues support commercial
discipline, as they are based on a return aimed at covering interest and principal.
Conclusions
Mexico has made significant progress under its current framework for the electricity
sector in developing a country-wide infrastructure and in meeting rapidly growing demand.
Grid roll-out to cover 95% of a population that has doubled in size over the last half century
is a considerable achievement. In many ways the existing governance and regulatory
framework for electricity, adjusted by the 1992 legal changes which allowed some private
participation in generation, has served Mexico well so far.
But it is time for a deeper change and a new perspective, not least to ensure that the
huge public investments of the past to upgrade and develop the Mexican electricity system
are safeguarded for the future and provide a platform for necessary improvements. There
is even a danger that achievements may be reversed. The electricity system shows clear
signs of increasing strain. Even with the support of private generation made possible by
the 1992 changes, it is not clear how the totality of projected generation capacity needs
for the next ten years will be met. Generation reserve margins are already on the way
to becoming uncomfortably low. The transmission and distribution systems need
maintenance and upgrading to ensure sound technical performance and secure good
service quality standards for the future. These investments are quite urgent. A wellfunctioning electricity system is not just an essential element of a well-functioning society,
but helps to underpin economic competitiveness too. In fact Mexico has always argued
that the country’s development and prosperity are closely tied to a well-functioning
electricity sector.
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At the same time, from a broader public sector, social and macroeconomic perspective,
it is increasingly difficult to justify or support major public investment in electricity. Yet most
investment in the Mexican electricity system remains public investment, and investment
needs are growing. There is an increasing burden on the public debt via the explicit or
implicit State guarantees which support public/private investment schemes, including IPPs
which supply power for the electricity public service. The government cannot afford to take
on much more public debt, and needs to deploy public resources on social programmes such
as education and health, and the eradication of poverty which is still a major issue. In other
words public investment in electricity represents an opportunity cost. Funds are tied up that
are needed elsewhere.
The government is fully aware of these issues. The public-private schemes of recent
years and the limited market opening to private generation have attempted to provide an
answer without making radical changes to the existing governance and regulatory
framework or the strategic status of electricity in the Constitution. Direct competition has
not yet been introduced, and the two State-owned incumbents, CFE and LFC, remain
dominant. The current arrangements provide no incentive for an improvement in the
performance of CFE and LFC. The subsidy system makes their finances opaque and
provides an excuse for focusing on the losses they may need to bear as a result, but
underlying this, the costs which they incur to provide electricity are likely to be higher than
might be expected under stronger regulatory oversight and a competitive market. The
number of reform proposals that have been tabled testifies to the fact that many are
persuaded of the need for further change.
For further change to be effective in promoting a strong electricity system however, a
fundamental reappraisal of two issues is necessary, and the current reform proposals do not
appear to do this effectively. The first, which would not require Constitutional change, is the
current regulatory and governance framework. The two incumbents need to be put on a
sounder footing. This would involve a mix of governance and regulatory changes to distance
their finances from the State budget, to set up a new more transparent approach for the
management of subsidies, and crucially, to establish strong independent regulatory oversight
for the promotion of cost recovery, efficiency improvements, and the achievement of preset
objectives such as quality standards. The distinction between regulation and participation in
the market is somewhat blurred under the current system, which gives CFE a quasi-regulatory
role on some important issues such as IPPs. Transparency should be the cornerstone of
effective new arrangements. The effective regulatory oversight of CFE and LFC also implies that
management separation of their different activities should be implemented: this would not
require Constitutional change either. These measures would help to identify, monitor and cut
costs, and encourage private as well as public investment (from CFE and LFC’s own resources).
The second, more controversial issue is the introduction of direct competition into the
electricity market. This would be the best long term approach for a new era in the
development of the Mexican electricity sector. International experience shows that effective
competition encourages efficiency and promotes competitiveness, and the private sector
needs to become a much stronger driving force of the Mexican electricity sector. More private
participation in a competitive framework would minimise the need for more public sector
financing and a consequent higher level of public debt, and raise the likelihood that Mexican
consumers will get assured supplies of electricity at low cost, because of the efficiency
incentives built into competitive markets driven by the private sector.
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Currently, companies that want a choice from CFE and LFC must establish their own
generation plant. Real consumer choice involves companies and potentially all users having
a choice of different suppliers, rather than being dependent on the incumbent monopoly or
having to invest in their own power plant. But if competition is to be introduced it needs
careful and strong management of a range of issues to encourage market entry. Ensuring
effective separation of CFE and LFC’s activities and establishing fully independent system
operation to underpin competitive neutrality for market participants are key ingredients,
among others.
If competition proves a difficult goal because of problems in changing the
Constitution, a transitional phase is a possibility, which takes the current IPP-based system
a stage further with independently managed competitive bidding for generation capacity
and perhaps also the establishment of a “Single Buyer” to allow managed consumer choice
based on cost recovery. This too requires strong and independent regulation.
If regulatory, governance and market changes are well planned, well implemented and
complete, if transparency is an integral part of the new arrangements, and there is effective
communication of reform plans, there is no need to fear failure. Reform failures in other
countries are usually due to a missing element of reform, inappropriate changes,
ineffective communication or a failure by the government to follow through on plans. An
important issue is regulatory risk. Mexico is in competition globally for investors’ money,
and stability and predictability as well as clarity of reform proposals is important for
investors. As far as possible Mexico should be clear about long as well as short-term plans
for the electricity sector. A weak reform with uncertain objectives could backfire.
The Presidency proposals are on the right track, but they are not strong enough if
competition and its consequent efficiency gains are to develop rapidly. Details need careful
attention, some important aspects are vague, others are not addressed, and the two stage
approach is an issue if the objective is to promote effective competition. Maintaining a
balance between private and public sector participants, if that is the goal, is a challenge
which needs strong and careful regulatory and governance arrangements.
Last but not least, it is important that Mexico confirms the legality of private
participation, if that is necessary. Given the Supreme Court ruling on the 1992 law which
noted the possible unconstitutionality of the limited market opening allowed by that law,
this implies the need for appropriate Constitutional amendments, rather than a further
attempt to change the 1992 law.
Policy options for consideration
The recommendations are divided into five parts. Part A – Regulatory and corporate
governance changes – covers proposals which can be implemented without Constitutional
change. Part B – Market opening – would require Constitutional change. These two parts
together make up a comprehensive approach. Part C – A transitional option – is included in
the event that Constitutional change for market opening is not undertaken. Part D covers
proposals related to the gas market. Part E covers other issues which are relevant and
important whatever reform route is adopted.
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A. Regulatory and corporate governance changes
A.1. Strengthen CRE as the electricity sector’s independent regulator
CFE remains the dominant market player by far, controlling the grid and system
operation, and it is the largest generator. Significant new capacity additions are needed
over the next ten years to meet projected rising demand, amounting to roughly half as
much capacity again as there is today. Over half the generation investment needs are not
yet committed. Private investors in generation for self supply and co-generation, as well as
IPPs for the electricity public service, need further encouragement to enter this market.
To help secure further investment, the capacity for strong and independent regulation
needs to be reinforced. Under the current arrangements the regulatory authorities are
relatively weak vis-à-vis CFE. In particular, there are strong information asymmetries, and
CFE exercises a quasi-regulatory role on some issues. CRE needs an appropriate status as
well as the necessary powers, resources, and independence to ensure an effective oversight
of the electricity market and not least the two dominant incumbents, CFE and LFC. As
regards status, CRE needs a strong formal framework of independence vis-à-vis its
oversight ministry. It should be responsible, as it already is for gas, for electricity tariffs. It
should also have stronger powers over interconnection between CFE and private
generators. General powers that also need to be strengthened include effective access to
information, and effective sanctions for the enforcement of rules.
The choice of oversight ministry should be carefully assessed. Best practice would be
for the Energy ministry, SENER, to fulfil this role for all of CRE’s regulatory activities
including tariffs. It is usually preferable to avoid giving oversight to the Finance ministry
when the incumbent(s) are still State owned as this sets up a potential conflict of interest
between the ownership objective of maximising revenue, and the regulatory objective of
cost recovery and even-handedness between the market participants.
Both CRE and the oversight ministry should be adequately resourced for the tasks they
need to perform.
A.2. Set up transparent new arrangements for end user tariff subsidies and ensure
tariffs based on cost recovery.
The current subsidy system for end user electricity tariffs is opaque. It is tied up with
the aprovechamiento system under which the rate of return on CFE’s assets, payments by the
government to CFE for infrastructure investments and payments by the government to
cover the cost of subsidies incurred by CFE are mixed up together. The payment of
subsidies should be transparent and separate from other costs, such as provisions for
investment. This could be achieved by formally submitting them to Congress for approval,
and identifying them in consumers’ electricity bills.
The subsidy system is also, despite the 2002 reforms, too broad, with subsidies still going
to most residential consumers. The system should be refocused on the poorest consumers.
The current tariff structure review provides an opportunity to refocus the system.
A new system should also ensure that end user tariff regulation is cost reflective, as far
as possible. Regulation should aim at cost recovery. The separate identification and
management of subsidies is an essential part of this.
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A.3. Strengthen CFE and LFC autonomy and corporate governance.
CFE and LFC’s current corporate governance and financing needs to be overhauled in
order to secure cost recovery, promote greater cost efficiency and productivity, and to
provide an adequate basis for urgently needed investment in the electricity public service,
especially the grid (both for essential maintenance and for further development). This
change would need to go hand-in-hand with stronger, independent regulatory oversight.
CFE and LFC need greater financial autonomy from the State’s budget so that they can
start to base their activities on real cost recovery and develop greater efficiency. Such
changes would involve not only effective regulation, but also corporate governance changes
aimed at promoting autonomy, transparency, and an appropriate role for stakeholders.
Performance objectives should be defined, and systems put in place for measuring actual
performance and establishing managerial incentives for achieving the objectives.
A.4. Restructure CFE and LFC to clarify costs and improve regulatory oversight.
CFE and LFC’s costs are not clear under the current system. This is partly related to the
aprovechamiento system (see above) which also makes subsidies opaque and needs
unwinding. The incumbents’ costs need to be transparent and to be allocated to the different
activities of the electricity supply chain-generation, transmission, distribution, and supply to
end users. This will enable an assessment be made of efficiency and productivity which is
not possible at present, allow CRE to regulate more effectively the interface between CFE and
private generators, and not least help a move toward cost reflective pricing. Management
separation rather than weaker accounting separation is recommended, to maximise the
incentive for correct allocation of costs to the different categories.
A.5. Consider a stronger role for the competition authority.
The competition authority (CFC) only has a very limited role in the electricity sector at
present. But its current powers with regard to monopolistic practices by State enterprises
in non-strategic areas could be deployed more strongly, for example in relation to CFE’s
interface with private generators. A stronger participation and advocacy role in the reform
debate would also be helpful.
B. Market opening
B.1. Allow direct competition between customers and suppliers in the electricity
market.
The best long term prospects for the Mexican electricity sector lie in the development
of a competitive market. This would establish pressures for sustained efficiency, which
regulation alone cannot wholly achieve. A well-conceived competitive market would also
attract further investment. New legislation might allow for the possibility that all end users
can choose their supplier in due course. Transitional phases could be envisaged, with a
progressive broadening of consumer choice and the development of an electricity
wholesale market once there is a critical mass of buyers and sellers.
B.2. Clarify the scope of the electricity public service, and review financing
and the means of its delivery.
If the notion of an electricity public service is to coexist happily with a competitive
market, its definition needs to be precise. A review should be undertaken of the best means of
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5. ELECTRICITY
delivery, and how to pay for it. It does not necessarily need to be vested with the incumbents.
Private entities can make a financial contribution to its cost.
B.3. Establish independent system operation and grid management, as soon as
possible.
Independent system operation is at the core of a well functioning competitive market, to
ensure that generation dispatch is even handed across market players. Even handed
management of grid access is also crucial. So long as system operation and grid management
remains a part of CFE this cannot be expected to happen. At a minimum, there needs to be
management separation – accounting separation plus separation of management and
personnel from other activities – of system operation and the grid from CFE’s other activities.
B.4. Establish an effective ex ante regulatory framework for grid access
and interconnection.
As well as effective separation of the grid, there needs to be effective regulation of grid
access and interconnection to ensure that new players can enter the market as suppliers in
competition with CFE. OECD experience points to the need for ex ante regulation of these
issues, to avoid protracted negotiations with the incumbent. The methodology for grid
access charges needs careful review.
B.5. Ensure that the current market participants know where they stand.
IPPs, self-suppliers and co-generators have entered the market so far on the basis of a
certain regulatory framework. Under a new framework which allows direct competition,
they need to know how they will fit. If necessary, arrangements for dealing with stranded
costs need to be put in place so as to ensure a level playing field for competition.
C. Transitional option (in the event that market opening through Constitutional
amendment proves difficult)
C.1. Consider a Single Buyer transition.
If direct competition is not an option, aspects of the current regulatory regime could
be strengthened and developed. The arrangements for competitive selection of new
generation capacity could be strengthened by putting this in the sole hands of the regulator
or independent system operator/grid manager. A framework could be established for three
way transactions under which an independent single buyer would manage the purchase,
sale and delivery of power between clients who have independently chosen their own
supplier and purchaser.
D. Gas market changes
D.1. Consider whether adjustments are needed in the short term to improve
the effectiveness of the current downstream gas market regulatory framework.
Fuel costs are an important part of the total costs of generation, and the use of natural
gas in power generation is developing rapidly. Investors will consider the current and
expected future cost of natural gas in Mexico in weighing up where to invest. A review of
the effectiveness of the current regulatory framework would be useful. Consideration
should be given to whether regulation of PEMEX first hand sale pricing of natural gas is
adequate to ensure that PEMEX does not charge above costs, and third party access
regulation to PEMEX pipelines should be strengthened.
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D.2. Consider deeper changes to the gas market in order to encourage
the development of Mexican gas reserves.
Over the longer term, efforts should focus on reducing Mexico’s rapidly growing
dependence on imports. A review of the effectiveness of the current framework for ensuring
adequate exploration and production of Mexico’s own reserves should be carried out.
E. Other issues
E.1. Develop a communications and implementation strategy for reform.
Once the direction of reform is clarified, the government should put in place a
comprehensive consultation and communications strategy which extends to all major
stakeholders, including the general public. Regulatory risk is a major factor for investors
weighing up the options over where to invest. If there are important changes to be made in
a market which they are assessing, they need clarity over the direction of reforms.
Implementation is the next important step which needs careful and continuous
management. Wherever possible important issues should be covered by primary
legislation rather than secondary rules, to minimise uncertainty and ensure that there is
no scope for distortion of the original intent.
E.2. Ensure that regulatory quality principles are applied to new laws and rules
for the electricity sector.
Regulatory quality disciplines such as RIA should continue to be systematically
applied to proposed new rules and laws for the electricity sector. Efforts should be made to
focus on whole regulatory packages, not just individual rules.
E.3. Minimise, as far as possible, the burden of regulatory processes for the siting
of new energy infrastructure.
Problems with the siting of new energy infrastructure can delay needed investment
unnecessarily. A review of the current permit processes to establish whether
improvements could be made, including better coordination between the different levels of
government, should be considered.
E.4. Continue efforts at promoting electricity efficiency via demand management.
Existing initiatives to reduce electricity intensity by improving energy efficiency and
conservation should be pursued. This should include encouraging users to manage their
own demand needs wherever possible.
E.5. Promote the development of regional markets.
A long run objective should be to develop closer regulatory and physical links with
both the North American market, and with Guatemala and Belize. This should build on
existing initiatives such as the NAEWG and the plans for further border interconnections.
At present the Mexican electricity system is relatively isolated. The development of such
links and the evolution of a regional market (or markets) has a number of potential
advantages: more investment opportunities, lower generation reserve margins in a larger
interconnected market, and not least, stronger market pressures for efficiency than the
Mexican market on its own may deliver.
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Notes
1. Mexico has the fourth largest proven crude oil reserves in the Western Hemisphere after Canada,
Venezuela and the US, at 12.6 billion barrels. It has the sixth largest natural gas reserves in the
Western Hemisphere after the US, Venezuela, Canada, Argentina and Bolivia; proven reserves
stand at 15 billion cubic feet.
2. Article 3 of the 1975 LSPEE defines what is not considered to be public service. The only current
“definition” of public service is therefore a definition by exclusion, and is in a law, not the
Constitution. The scope of public service may therefore be said to be unclear.
3. This was quite a difficult technical undertaking. For example different frequencies were used
before the grid was finally unified.
4. In exceptional cases where CFE was not able to provide the electricity public service.
5. The World Bank notes that the gulf between rich and poor continues to grow wider. Some
45 million of Mexicans are poor (living on less than USD 2 a day) and 10 million are in extreme
poverty (less than USD 1 a day).
6. 88% of Mexican exports go to the US.
7. It also covers the states of Mexico, Morelos, Hidalgo and Puebla, a total of 20 m consumers
including Mexico City.
8. The pre 1992 legal framework allowed some very limited self supply for continuous own use (usos
propios continuos). This accounted for 2.8% of generation capacity allowed under the permit
system at the end of 2002 (594MW), and is nearly all co-generation.
9. IPPs may have two separate contracts – with PEMEX (or another provider) for power generation fuel
and transportation, and with CFE for electricity sales (a power purchase agreement or PPA).
10. The effective capacity contracted by CFE with IPPs.
11. This leaves 1.2% which is accounted for by usos propios, that is, the power used within generating
plants.
12. The EU internal market for electricity is still at a relatively early stage of development and not yet
generalised across all EU countries. Trade, however, is much more significant than Mexico’s
international trade.
13. It also, notably, opened Mexico’s petrochemical market, lifting restrictions on 14 of the
19 petrochemicals previously produced only by PEMEX, and allowed US and Canadian natural gas
suppliers to negotiate direct sales of natural gas to industries, utilities and other Mexican customers.
14. It should be noted that there is a two way causal relationship between GDP growth and electricity
demand growth. A low rate of GDP growth is likely to reduce electricity demand. Little or no
investment in electricity supply capacity is likely to affect GDP growth negatively.
15. The OECD would call this a pessimistic scenario.
16. Deconcentrated entities have limited technical and operational autonomy. They do not have a
distinct legal status from the ministry to which they are attached. They negotiate their budget with
their sponsor ministry. The sponsor ministry – SENER in this case – puts the budget request to the
Finance ministry – SHCP – for approval. SHCP in turn presents it to Congress for approval as part of
the overall budget package for the executive. SHCP may make adjustments to budgets over the
course of the fiscal year without recourse to Congress if government financial conditions require
it. Earnings or any other revenue such as fines are remitted back to the government. Decentralised
entities, by contrast, present their budget requests directly to Congress, and only Congress is able
to alter the budget during the fiscal year. Earnings are credited to the entity’s account.
17. From May 1993 to November 1995 the Energy Ministry granted 4 permits for self-supply and 9 for
co-generation. Permits granted by CRE from December 1995 to December 2003 include 18 for IPPs,
172 for self-supply, 33 for co-generation, 26 for imports and 6 for exports. By December 2003, the
total number of permits was: 172 for self-supply, 33 for co-generation, 18 for IPPs, 26 for imports
and 6 for exports.
18. NOMs are mandatory technical requirements or standards.
19. The others are postal services, telegraph and radiotelegraphy, petroleum and other hydrocarbons,
basic petrochemicals, radioactive minerals, nuclear energy, and the functions of the central bank
in producing coins and paper currency.
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20. CFC assessed whether any of the bidders would have substantial market power in the event that
the electricity market was subsequently opened to competition. It found no such prospect.
21. The revision also covers gas tarification.
22. The independent consultants were asked to perform four tasks under the supervision and
approval of the tariff group: review and update long term marginal cost calculations; complete a
benchmarking analysis, considering technical issues of generation, transmission and distribution
for tariff setting purposes; calculate a proper revenue requirement and propose a new tariff
structure; and carry out a feasibility analysis of implementing a real time tariff structure.
23. The services that CFE, as grid manager, needs to have in place to secure a reliable operation of the
transmission system, notably to maintain voltage and frequency control.
24. According to the LSPEE and its reglamentos, CFE can pay for capacity of up to 20MW, but can also
buy energy from sources that supply more than 20MW without paying for the capacity differential.
CFE, however, has never paid for excess capacity, which is a disincentive to investment in self
supply and co-generation. Energy payments by CFE generally involve generators with small excess
capacity, and the payments are generally determined as a percentage of the CFE-specified costs,
not the prices offered by the generator.
25. SENER’s long term perspectives report (Prospectiva del sector eléctrico 2003-2012) relies heavily on
information derived from CFE.
26. It has a staff of four to oversee the whole tarification work (gas as well as electricity).
27. Especially when compared with some other regulatory agencies in Mexico. See Chapter 4 on
regulatory agencies.
28. As well as subsidies, elements of cost for the user include aportaciones which are payments to CFE
for interconnection of users over 1KV, costs derived from failures in the stability and continuity of
service, and costs from damaged equipment due to poor quality service.
29. There may be other implicit subsidies beyond aprovechamiento. For example, the tariffs for public
services such as street lighting which are paid by the government to CFE and LFC may be above cost.
30. The statement of financial results for the two companies which is available on SENER’s Web site
suggests that LFC does not pay aprovechamiento.
31. Information taken from the CFE and LFC Web sites which provide financial information among
other data.
32. In publicly available documents, at least.
33. The Australian grid also covers 95% of its population.
34. In the Baja California system (interconnected with the US, but not with the rest of the Mexican
grid) the Western Systems Coordinating Council (WSCC) standard is used, that is 15% of peak
demand, or the capacity of the largest generating unit.
35. This development assumes that CCGTs will generally be the chosen technology for investment
projects that have not yet been committed.
36. The issue here is security of supply rather than the environment. From the environmental
perspective and as Mexico recognizes, a growing share of natural gas and a diminishing share of
heavy fuel oil is a positive development.
37. In 2002 and 2003 most of PEMEX investment went on E&P for oil and gas. There is, however, a long
lead time between E&P activities and the feed through to market production.
38. SENER notes that roughly three quarters of Mexico has a daily average solar exposure of 5 KWh/m2.
39. The uncertainty that surrounded reforms in California is widely regarded as a leading cause of the
state’s inadequate investment performance.
40. More precisely, at least 66% of deputies, 66% of senators and 50% plus 1 of the States must approve
a Constitutional change.
41. A new energy minister, Mr. Fernando Elizondo Barragán, has now been appointed.
42. The focus on one of the many reform proposals is largely for convenience, to avoid repetitive
review of the same issues, and because a review of this proposal allows an assessment to be made
of all the relevant issues.
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43. The EU experience is relevant. The first EU directive in 1996 to open the internal EU market for
electricity set a succession of dates for progressively smaller consumers to have a choice of
supplier (starting with consumers of 40GWh and above). The most recent directive, reflecting the
relative lack of progress toward a competitive market in some EU member states, opens the market
to all consumers.
44. This is the value that consumers attach to an uninterrupted supply of electricity. This valuation,
known as the Value of Lost Load or VOLL, is defined for each consumer as the monetary value that
he attaches to the last unit of energy consumed. In other words VOLL measures how much a
consumer would be willing to pay in exchange for not having to reduce his energy consumption by
one unit. System VOLL is the VOLL of the consumer with the largest valuation. VOLL is important for
investment: conceptually at least, the optimal investment in electricity generation depends on VOLL.
45. France for example.
46. Germany has recently decided to convert its current ex post negotiated approach overseen by the
competition authority and managed by industry association agreements, to an ex ante regulated
approach managed by an independent electricity/gas regulator.
47. It may be hard to place a market value on network assets constructed under central planning, and
changes in network usage after competition may result in some existing assets being stranded.
48. This is a little surprising as the tariff review which has recently been launched identifies a number
of relevant issues for development and adjustment.
49. The President Fox proposal rules out capital opening. However at least one other reform proposal
raises the issue.
50. CRE could become a decentralized public entity with legal authority, its own assets, and technical
and operational self determination (organismo descentralizado). But there may be a legal hurdle to
overcome with the latter route, as it may require a corresponding change to the State-owned
companies Act (Ley Federal de las Entidades Paraestatales) which limits the type of activities that can
be carried out by decentralized agencies.
51. It already has this power for natural gas distribution tariffs.
52. The SENER’s Reglamento Interior, for example, would need adjustment to underscore greater
independence.
53. This issue could arise in Mexico. PEMEX, which controls the Mexican upstream gas sector, is already
a player in generation under the current regulatory framework. If the market were to be opened, it
may wish to expand its involvement, which is currently largely confined to co-generation plants.
54. 59.1% of total generation is projected to be natural gas – based by 2011 compared with the
current 26.8%.
55. “Commercial losses” through actions such as hooking cable to the grid and tampering with meters
worsened after the 2002 reforms and fraud remains a big problem. The LFC Web site issues regular
reports on this problem in Mexico City.
56. For example Poland allowed generators to be compensated for their stranded costs by accounting
for the difference in prices achieved in competitive markets from those embedded in pre-reform
contracts.
57. For example the Federal level regulates emissions, water use, port access; the state and local levels
regulate land use.
58. The Power to Choose: demand response in liberalized markets, IEA 2003.
59. IPP contracts are almost invariably two-part contracts that pay a fixed annual fee to cover the IPPs’
fixed costs, and amounts designed to cover the variable costs for each unit of power generated. The
issue is where the profits are earned: how to get the plants to run at all if they have been paid their
profits up front in the fixed charges; or if the profits are paid in the variable payments, how to get
the plants to stop running when they are not needed. The solution is usually to pay the profits in
the fixed charge and to have penalties for failing to run a minimum number of hours.
60. If the Single Buyer is taken out of the picture, the system becomes negotiated third party access.
61. More developed still – but this breaches the boundaries of current Constitutional constraints – is to
allow generators to sell power directly to distributors and large consumers (the so called bilateral
contracts model).
62. Mexico’s public debt is not especially high relative to GDP.
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Abbreviations
CCGT
CENACE
CFE
COFECO/CFC
COFEMER
CRE
E&P
EIA
EU
GRT
IEA
IPP
ISO
LDC
LFC
LNG
LPG
LRIC
LSPEE
MIR
MR
MRO
MSC
NAEWG
NAFTA
NGC
NOM
OPF
PEMEX
PIDIREGAS
PPA
PPP
PRI
Combined Cycle Gas Turbine
Centro Nacional de Control de Energía (National Energy Control Centre)
Comisión Federal de Electricidad (Federal Electricity Commission)
Cómision Federal de Competencia (Federal Competition Commission)
Cómision Federal de Mejora Regulatoria (Federal Commission for Better
Regulation)
Comisión Reguladora de Energía (Energy Regulatory Commission)
Exploration and Production
US Energy Information Administration
European Union
Gestionnaire du Réseau de Transport (EDF grid management company,
France)
International Energy Agency
Independent Power Producer
Independent System Operator
Local distribution companies (natural gas distribution)
Luz y Fuerza del Centro
Liquefied Natural Gas
Liquefied Petroleum Gas
Long Run Incremental Cost
Ley del Servicio Público de Energía Eléctrica (Electricity Public Service Law)
Manifestación de Impacto Regulatorio (Regulatory Impact Assessment – RIA)
Margen de Reserva (Reserve Margin)
Margen de Reserva Operativa (Operative Reserve Margin)
Multiple Service Contracts (form of public/private partnership for natural
gas projects)
North American Energy Working Group
North American Free Trade Agreement
National Grid Company (England and Wales)
Norma Oficial Mexicana (Mexican Official Standard)
Obra Pública Financiada (form of PIDIREGAS project)
Petróleos Mexicanos
Proyectos de Infrastructura Productiva de largo plazo con impacto diferido
en el Registro del Gasto (public/private infrastructure projects)
Power Purchase Agreement (long term electricity contract)
Purchasing Power Parity
Partido Revolucionario Institucional
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5. ELECTRICITY
PROFECO
PSBR
RPI
SEN
SENER
SHCP
VOLL
WSCC
Procuradoría Federal del Consumidor (Federal Consumer Protection
Agency)
Public Sector Borrowing Requirement
Retail price index
Sistema Eléctrico Nacional (National Electricity System)
Secretaría de Energía (Ministry of Energy)
Secretaría de Hacienda y Crédito Público (Ministry of Finance and Public
Credit)
Value of Lost Load
Western System Coordinating Council
Bibliography
Cómision Federal de Electricidad, Web site, www.cfe.gob.mx, Mexico.
Cómision Federal de Mejora Reguladoria, Web site, www.cofemer.gob.mx, Mexico.
Cómision Reguladoria de Energía, Informe Annual 2002, Mexico.
Energy Information Administration, Web site, www.eia.doe.gov, US.
IEA (1996), Regulatory Reform in Mexico’s Natural Gas Sector, Paris.
IEA (2001), Competition in Electricity Markets, Paris.
IEA (2001), Regulatory Institutions in Liberalised Electricity Markets, Paris.
IEA (2002), Security of Supply in Electricity Markets, Paris.
IEA (2003), Energy Prices and Taxes, third quarter, Paris.
IEA (2003), Power Generation Investment in Competitive Markets, Paris.
IEA (2003), The Power to Choose: demand response in liberalized electricity markets, Paris.
IEA (2003), World Energy Investment Outlook, Paris.
IEA (2004), Security of Gas Supply in Open Markets, Paris.
Luz y Fuerza, Web site, www.lfc.gob.mx, Mexico.
Mexican Office of the President (2003), Como vamos a la mitad del camino, Mexico.
OECD (1999), Regulatory Reform in Mexico, Paris.
OECD (2003), Economic Survey of Mexico, Paris.
OECD, Background Reports on Regulatory Reform, Web site, www.oecd.org/regulatory reform/background
reports, Paris.
Red Energetica, electronic newsletter, various issues, Mexico.
Secretaría de Energía, Web site, www.energia.gob.mx, Mexico.
Secretaría de Energía, Prospectiva del Sector Eléctrico 2003-2012, Mexico.
World Bank, Web site, www.worldbank.org, Washington.
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ISBN 92-64-01750-X
OECD Reviews of Regulatory Reform: Mexico
Progress in Implementing Regulatory Reform
© OECD 2004
ANNEX A
Implementation of the 1999 Recommendations
Recommendations of 1999 Review
Actions taken since 1999 Review
Assessments/recommendations
Establish consistent government-wide
standards for regulatory quality
by closing gaps, eliminating
exemptions in the current policy
framework and expanding the review
programme beyond “business”
regulations to all significant regulations.
Reforms to the Federal Administrative Procedure Law (LFPA)
in 2000 institutionalised a regulatory improvement
programme, and they applied not only to substantive laws
and lower-level rules that involve businesses formalities
and regulations, but also those imposed to citizens.
LFPA extends the scope of regulatory policy to areas such
as public procurement and public works, social security
and technical standards. It established a clear defined
scheme for the review of all regulatory activities of federal
ministries and decentralised agencies.
LFPA maintains some exemptions,
particularly on regulations related to tax
formalities, public servant obligations,
agrarian and labour justice and those
established by the Prosecution and
the Ministries of Defense and Marine.
To revise the exemptions of the LFPA,
especially on fiscal regulations that
could be made subject to some form
of simplification and review.
Further encourage regulatory reform
by co-ordinating with the states
and helping them to develop
management capacities for quality
regulation.
COFEMER has strengthened its relations with state
and municipal governments in two ways. First, co-ordination
agreements have been signed with state to implement
regulatory improvement programmes similar to the one
at the federal level. Secondly, COFEMER designed
the System for Rapid Business Opening (SARE), which is
a cornerstone for multi-level regulation in Mexico. It reduces
basic formalities – two federal formalities in one business
day – for business activities in 658 low risk economic
activities to start operations. State and municipal formalities
are also revised through the system, in order to have
a compatible framework at all levels of government.
Broaden the scope of the regulatory
improvement programme to lower
levels of government.
More resources – human, technical
and financial- should be allocated to
the SARE. Reduction of excessive red
tape could be improved through
co-ordinate efforts with other
institutions or programmes.
I. Regulatory policies
Encourage local governments to adhere Co-ordination agreements with states tend to attain an
See above.
to principles of efficient regulation.
efficient and complementary regulatory framework in and
across all levels of government. The results, however, remain
uneven.
Review and reform the subnational
regulatory framework associated with
the supply of private local
infrastructure.
No action because the supply of private local infrastructure There is no legal mandate to include this
(waste disposal, for example) is a mainly municipal activity. in the work done by COFEMER.
II. Regulatory institutions
Promote quality regulation by
transferring the CDE/UDE to a location
at the centre of government with
cross-cutting management and
co-ordination authorities, such as
the president’s office, and by
strengthening its attention to consumer
protection and citizen welfare.
The reforms of the LFPA allowed the creation of a technically
and functionally autonomous, the Federal Regulatory
Improvement Commission (COFEMER), which replaced
the UDE. COFEMER is an autonomous body of the Ministry
of Economy. The General Director is designated by
the President of Mexico; and he is assisted by the Regulatory
Improvement Council integrated by public, social, private
and academic sectors’ representatives. The Federal
Competition Commission (CFC) and the Attorney General
for Consumer Protection (PROFECO) were included
as members of the Council.
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The regulatory system and mechanisms
improved considerably with the
establishment of COFMEER, which was
empowered by law to conduct a more
consistent, coherent and forwardlooking approach to regulatory reform.
219
ANNEX A
Recommendations of 1999 Review
Actions taken since 1999 Review
Assessments/recommendations
III. Regulatory tools and procedures
220
Further improve transparency by
extending legal requirements for notice
and comment procedures, already
required for technical standards, to
all ministries and agencies during the
development and revision of regulation.
Procedures for openness should be
standardised for all advisory bodies.
All draft regulatory proposals and RIAs are made public from
the moment in which they are sent to COFEMER (at least
30 working days before they are published or emitted),
and COFEMER must consider all public comments it receives
before its judgement, in compliance with the LFPA.
Documents must also be publicly available on the Internet
for a period of at least 20 working days in accordance
with the new Federal Law on Transparency and Access to
Governmental Information approved by Congress in 2002.
Strengthen disciplines on regulatory
quality in the ministries and agencies
by refining tools for regulatory impact
analysis, law drafting, and use
of alternatives to regulation, and
training public servants in how to use
these tools for regulatory quality.
i) Require that RIAs be systematically
published during the notice
and comment process for each
regulation.
ii) Train public sector employees
in how to conduct regulatory impact
analysis.
iii) Promote the adoption of alternatives
to traditional regulation by
developing guidance and training.
iv) Improve regulatory clarity
and simplicity through better law
drafting.
RIA is a standard practice of evaluation, analysis
and justification of draft regulations. All regulatory proposals
which impose compliance costs on business and citizen
obligations must be accompanied by regulatory impact
analysis (RIAs), which include a discussion of objectives,
alternatives considered, potential costs and benefits,
and the results of public consultation.
A new electronic system for submitting RIAs has been
elaborated and is compulsory to all agencies. It facilitates
RIA’s publication for notice and comment, eliminating
paperwork burden.
Training seminars are offered by COFEMER to teach public
servants how to use the on-line system for development of
RIA and how to elaborate a RIA, to improve communication
and relationship between COFEMER and public servants
in charge of proposals, to develop skills in quantify effects
of regulation and regulatory and non regulatory alternatives,
to spread widely knowledge about the RIA and to clarify
COFEMER´s review criteria.
Strengthen the efforts on quality
regulation through refining some
regulatory tools, such as a qualitative
assessment of the Advance Indicator
of the Biennial Programmes (IABP),
encouraging plain language drafting
and undertaking technical assistance
towards regulatory quality for
the legislative branch.
Make RIAs more widely available
to the public for information.
Development of regulatory impact statements and send draft
regulations are available on-line. Full texts of many draft
proposals and its corresponding RIAs as well as COFEMER´s
opinions are available on-line at www.cofemermir.org.
By LFPA, public comments have to be considered
in the review process.
COFEMER’s site should be promoted
and extend the availability
of information on regulations (public
comments, additions and corrections
to RIAs, preliminary and final opinions).
Speed up effective reform by adopting
a systematic and comprehensive
approach to the review of existing laws
and regulations.
The reforms to the LFPA established that COFEMER has
the faculty to review the national regulatory framework,
to diagnose its application, and to present administrative
or legislative proposals to improve the regulation in activities
or specific economic sectors directly to the President.
COFEMER carries out a detailed revision and diagnosis when
a specific economic sector will be subject to a significant
reform. Periodically COFEMER makes, by its own initiative,
diagnoses on regulatory framework quality, in order
to identify empty legal areas or problems that can be
corrected or adapted. These diagnoses can turn into
concrete proposals for legislative or administrative reforms.
To promote a better legal framework
for regulations with a clear hierarchy of
rules is advisable. The legal framework
for regulations presents important gaps
in design and structure, which influence
the revision process of COFEMER.
Review laws and regulations to improve The regulatory framework of concessions is related to
concession processes.
the concept of public service governed by the Constitution.
COFEMER reviews the general conditions by which
concessions are designed and that are contained
in sector-specific laws.
COFEMER has no legislative mandate
to review individual titles
of concessions.
Make public consultations
a requirement, not a suggestion.
Public consultation is important
to regulatory quality. Even if COFEMER
makes publicly available all draft federal
regulations and has encouraged
institutions to put into place
consultative mechanisms, the legal gap
still poses limitations to transparency
because government officials preserve
discretionary powers on how
to organise consultation mechanisms.
The risk of capture by vested interest
groups increases as well, since the legal
framework is weak in this respect.
Public consultations are encouraged through RIA, but there
is no legal obligation for making public consultation
for federal regulatory proposals subject to LFPA, with
the exception of technical standards.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
ANNEX B
ANNEX B
General Description of the Four Mexican Regulatory
Agencies, as of February 2004
Name of the agency
Date of establishment/
Relevant legislation
last modified
Sectors under authority
Deconcentrated body2
of the Ministry
of Communications
and Transports, with
technical and operational
autonomy.
Federal
Telecommunications
Commission (COFETEL)
1996
Presidential Decree setting
up the Commission
(1996).1
Also briefly mentioned
in the Federal
Telecommunications Law
(1995).
National Water
Commission (Conagua)
1992
National Water Law (1992); Water.
Regulation of the National
Water Law (1994); Internal
Regulation of the Ministry
of Environment and Natural
Resources (2003).
National Banking
and Securities
Commission (CNBV)
1995
National Banking
Banking and Securities. Does not Deconcentrated body of
and Securities
cover insurance, non banks or
the Ministry of Finance
Commission Law (1995).3 retirement and pensionsfunds.
(Secretaría de Hacienda y
Crédito Público) with
technical autonomy and
executive powers.
Energy Regulatory
Commission (CRE)
1993, 1995
Telecommunication networks
and services: local and long
distance fix and mobile basic
and added value services;
satellite communications; pay TV
and audio (CATV, DTH Systems
and MMDS Systems);
interconnection and international
traffic interchange. TV and radio
not included.
Institutional, legal status,
and sector
Electricity and natural gas.
Decree setting up
the Energy Regulatory
Commission (1993);
Energy Regulatory
Commission Law (1995).4
Deconcentrated body of the
Ministry of Environment
and Natural Resources
(Semarnat).
Deconcentrated body
of the Ministry of energy
but also Autonomous
regulatory agency (by law).
1. Additional legislation includes internal by-laws of the Ministry of Communication and Transports.
2. Organo desconcentrado: entity created by law as a part of the executive branch, enjoying technical autonomy but
without legal personality and own assets.
3. Additional legislation governing includes: Credit Institutions Law (Ley de Instituciones de Crédito); Auxiliary Credit
Institutions Law (Ley General de Organizaciones y Actividades Auxiliares del Crédito); Securities Market Law (Ley del
Mercado de Valores); Financial Groups Law (Ley para Regular las Agrupaciones Financieras); Credit Information
Companies Law (Ley para Regular las Sociedades de Información Crediticia); Collective Investment Schemes Law (Ley de
Sociedades de Inversión); Public Credit and Savings Law (Ley de Ahorro y Crédito Popular).
4. Additional legislation includes: Natural Gas Regulation, Public Electricity Service Act, Public Electricity Service
Ruling Act, Public Electricity Service Act Ruling on Contributions, Foreign Investment Act.
Source: OECD.
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ANNEX C
ANNEX C
Recommendations from Past OECD Reviews
Recommendations from the 1999 Regulatory Reform Report
Review carefully the structure and experience of the sectoral agencies
Launch a comprehensive, independent review of the new regulatory agencies and a
general revision of their mission statements, as the first step toward improving their
efficiency, independence and accountability by strengthening their systems of governance,
policy coherent, transparency of their decisions, statutory goals (mission statements),
working methods, and relations with the competition authority.
Focus competition policy on regulated and privatizing sectors
Maintain competition policy attention on regulatory issues and regulated and
privatising sectors, with analysis, publicity, and enforcement, as long as competition is still
impaired by controls on entry and by other kinds of potential regulatory bias.
Review and reform the subnational regulatory framework associated with the supply
of private local infrastructure
Improve local governments’ regulations governing the private sector provision of
public goods and services, private concessions and government procurement
Make the review of existing requirements more systematic and effective
Review laws and regulations in order to improve the concession system. In the past,
concessions have been a costly, complex, opaque and overly discretionary way to regulate
the private sector in the Mexican network and natural resource industries.
Telecommunications sector: further regulatory reform and market opening would boost
consumer benefits
222
●
Enhance the independence and role of COFETEL by appointing Commissioners for
overlapping fixed terms, enhancing their tenure by making removal from office difficult,
and delegating the power to issue, enforce and revoke concessions from SCT to COFETEL.
●
Enhance the consultation arrangements in the telecommunications sector.
●
Establish formal consultation and transparency procedures for COFETEL with the
government, the industry and the public to enhance the level of participation and
improve the quality of decision making.
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ANNEX C
●
Ensure that full use of mandatory quality controls established by the government for the
review of its regulatory powers is made in the telecommunications sector.
●
Delegate the power to issue, enforce and revoke concessions from SCT to COFETEL.
●
Disclose the total amount of spectrum that could technically be used for a new service
prior to auctioning new spectrum.
●
Implement and enforce asymmetric regulation for the dominant carrier in conformance
with Article 63 of the FTL.
●
Limit the discretion of COFETEL to grant concessions and to impose conditions on
concessions. Issue concessions that do not restrict lines of business. Minimise coverage
and commitments required of the concessionaires.
●
Reconsider the proportional return system for international traffic with the US and with
other countries as competition develops.
●
Amend the FTL to eliminate, for carriers which are non-dominant, the requirement for
COFETEL to register and publicise prices.
●
Undertake a number of policies to improve the foundations on which interconnection
charges are set, namely: clearly identify the components of interconnection charges
which are designed to compensate for fixed and common costs of local service; allow the
process of rebalancing to be completed by authorising Telmex to raise its prices for local
service (especially business local service) to eliminate any remaining deficit; and pursue
other approaches to the covering a deficit on local service (if one exists) through other
mechanisms (such as the fund mechanism below).
●
Structure interconnection charges according to the underlying cost – especially, adopt a flat
per call charge for interconnection for local calls and reduce real interconnection charges
over time according to best practice and ensure that Telmex improves productivity.
●
Promote network expansion, universal service and economic efficiency objectives by
establishing and explicit, portable, competitively and technologically neutral funding
mechanism.
●
Develop and carry out plans to implement number portability and access to rights of way
as soon as possible.
●
Restrict the price cap to only those services in which there is an absence of competition.
●
Dominant local carriers should be prevented from restricting competition by acquiring
existing cable television infrastructure.
●
Develop formal co-operation arrangements between COFETEL and CFC for the joint
enforcement of competition law prohibitions in the telecommunications sector.
●
Increase the maximum sanctions set out in the FTL to a level at which the sanctions
could have a material impact.
Assessment and recommendations from the Economic Survey, Mexico, 2002
●
A wide ranging structural reform strategy needs to be continued… deepen the
liberalization of network industries (where the reform process has stalled) by creating
the appropriate regulatory framework and actively enforcing competition rules.
●
Privatisation and liberalization should lead to greater competition, in the electricity
sector in particular.
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223
ANNEX C
●
But in some areas the link between privatization and competition policy has yet to be
firmly established and the authority and independence of the regulatory commission
needs to be strengthened.
●
In others, notably the electricity sector, the reform process has stalled.
Action taken since 1995 has strengthened the financial sector… But the Banking sector
remains relatively inefficient
Finally, the coordination between the different regulatory agencies responsible for the
financial sector should be improved and their autonomy reinforced by a secured source of
financing and by having their governing boards appointed for a fixed term.
Assessment and recommendations from the 2004 Economic Survey, Mexico
Much remains to be done to make the business environment friendlier and to increase
competition in key sectors
●
In the energy sector a coherent reform strategy will have to be implemented.
●
In the telecommunication sector, despite the privatization and deregulation of
the 1990s, and the growth of the industry and the drop in tariffs in real terms,
telecommunication density remains lower and tariffs higher than in most other OECD
countries. To enhance competition in the market, the authority of COFETEL, the
regulatory body has to be strengthened.
More use of economic instruments is needed to ensure a sustainable, unpolluted water
supply
Water use in Mexico is on an unsustainable path. A large number of underground
aquifers are being depleted. In many cases, this is the result of over-extraction by the
agricultural sector for irrigation use. Farmers are now paying a larger part of the operating
costs of irrigation systems but the remaining direct subsidies need to be ended and the
agricultural sector should be obliged to pay the market price for electricity used for
pumping. As well the irrigators should pay for extraction rights rather than being
exempted. In urban areas, the challenge is to convince local authorities who control the
utilities, to place water distribution on an economic footing. Raising water charges would
also help to finance the major investment programme that is needed both to improve the
treatment of wastewater,, more than three-quarters of which is discharged without
treatment into rivers and to expand the provision of potable water in rural areas and its
quality in both rural and urban areas. Ensuring that both local authorities and industry pay
the legislated penalties is also essential in order to lower pollution.
OECD 1998 Environment review (water)
It is therefore recommended that consideration be given to the following proposals
224
●
Further pursue measures to reduce health risks from contaminated water, particularly
in rural areas.
●
Strengthen the enforcement of water regulations, concessions and permits, as well as
the collection of water abstraction and pollution fees.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
ANNEX C
●
Complete the management reforms in the areas of irrigation, municipal water services
and the devolution of functions to the states.
●
Strongly pursue measures to improve the efficiency of water use for irrigation and other
purposes.
●
Examine priorities for public investment in water infrastructure and continue setting up
public-private partnerships for financing, building and managing municipal water
services.
●
Establish clear performance criteria and accountability mechanisms for all water
utilities.
●
Establish all proposed basin councils and enable them to become strong water resource
management agencies (i.e. provide mechanisms to allow them to generate their own
financing).
OECD 2003 Environmental Review
It is recommended to
●
Increase current water-related investments and management efforts.
●
Pursue current proposals to increase compliance by local utilities and industry with the
effluent limits and deadmlines of 1996 standard.
●
Encourage drinking water and waste water facilities to obtain ISO accreditation to
improve the operational performance of treatment plants.
●
Continue efforts to improve the water efficiency of agricultural irrigation, particularly
groundwater-fed irrigation; take measures to halt overexploitation of groundwater
aquyifers.
●
Further develop demand management measures that encourage sustainable water use
and further progress in the transition towards pricing of water services, whilst giving
attention to the special needs of the poor.
●
Strengthen and further develop and integrated watershed approach to both improve
water and forest resources management and provide environment-related services more
efficiently.
●
Reinforce current policies for awareness raising on water quality and for fostering
stakeholder participation in water basin management.
OECD Review of Mexico, Competition and Policy (2004)
The report recommends that the Competition Authority (CFC)
●
Provides respondents in Commission proceedings with better incentives to settle cases
by consent and thus reduce the volume of Amparo (judicial review) suits filed against the
Commission.
●
Encourage the identification of economists with appropriate professional expertise for
retention by Amparo courts as experts in CFC cases.
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225
ANNEX C
The report also recommends that the Commission seeks action by Congress
(or as appropriate the judicial branch) to
226
●
Assure that the CFC has an adequate opportunity to participate in all proceedings
conducted by federal regulatory agencies, and require that regulatory agencies reply on
the public record to the Commission’s comments.
●
Establish a specialized Amparo court with economic expertise to hear cases from the CFC
and other agencies that deal with economic issues.
●
Prevent Amparo courts from granting inappropriate stays of CFC orders during judicial
reviews.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
ANNEX D
ANNEX D
Independence and Financing of the Four
Mexican Agencies
Name
of the regulatory
agency
Head
Appointment
mechanisms
Terms of office
Actual duration
of office
in recent years
(average)
Staff
Budget
(million €/
pesos)
Financing
Federal
Board of
Telecommunications 4 members
Commission
(COFETEL)
Board President
and members
are appointed
by the President
of Republic upon
advice of
the Minister for
Communication
s and Transports
No fixed term;
all board
members
dismissible at
the appointer’s
head
Four or five
496 (2004)
board
presidents since
the creation
of the agency
28 (2004)
[379 pesos]
27.13 (2003)
[369.5 pesos]
State budget
National Water
Commission
(Conagua)
Director General
appointed by
the President
of Republic
No fixed term;
dismissible at
the appointer’s
head
Two Directors
General over
12 years
17 167
(2004)
794 (2004)
[10,760 pesos]
1 021 (2003)
[13,880 pesos]
State budget.
About 72%
derives from fees
charged on
waters users
National Banking
Board of 13
and Securities
Commission (CNBV)
President
appointed
by Minister
of Finance; two
Vice-presidents
are designated
by the President
of the agency;
other members
of the board are
designated
by the bodies
they represent1
No fixed term;
President,
Vice-presidents,
other board
members
dismissible at
the appointer’s
head
Two Presidents
since
the creation of
the agency
1 250 (2004) 83 (2003)
[1 127 pesos]
Fees levied on
the supervised
entities and
charged
to issuers.
CNBV’s budget is
however part of
the state budget,
therefore it is not
necessarily equal
to the amount
of fees collected
Energy Regulatory
Commission (CRE)
Board members
(including
President)
appointed by
the President of
Republic among
candidates
proposed by
the Minister
for Energy
5-years
renewable term;
board members
not dismissible
for reasons
related to policy
Two Presidents
since
the creation
of the agency
139 (2004)
State budget
Director
General
Board of 5
10.6 (2004)
[144.8 million
pesos]
9.2 (2003)
[124.6 million
pesos]
1. Five members of the board are designated by the Ministry of Finance (Secretaria de Hacienda); three members from
the Bank of Mexico; one member by the National Insurance and Bonds Commission (Comision Nacional de Seguros
y Fianzas – CNSF); one member from the National Commission for the Retirement Savings System (Comision
Nacional del Sistema de Ahorro para el Retiro – CONSAR).
Source: OECD.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
227
ANNEX E
ANNEX E
Independence and Financing of the CFC and the IFAI
Name
of the regulatory
agency
Head
Appointment
mechanisms
Terms of office
Federal Competition
Commission (CFC)
Board of 5
Board members
appointed by
the President
of Republic at
staggered terms
10-years term
renewable.
Board members
not dismissible
for reasons
related to policy
Federal Institute
for Access to Public
Information (IFAI)
Board of 5
Board members
appointed by
the President
of Republic
and confirmed
by the Senate.
President of the
board elected
every two years
(renewable
once) by the
board members
6-years term,
not renewable.
Board members
not dismissible
for reasons
related to policy
Actual duration
of office in recent Staff
years (average)
One President
since
the agency was
created
Budget
(million €/
pesos)
Financing
144 (2003)
11.3 (2003)
[152 652 800
pesos]
State budget
200 (2004)
About
16.2 (2003)
State budget,
non modifiable
appropriation
proposed by
the agency
Source: OECD.
228
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OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
ANNEX F
Independence of Regulatory Institutions: the Case of Telecommunications
Decisions can be overturned by1
Country/regulator
Regulator appointed by
Term of office
Financing Source
Reports to
Australia: Australian Communications Authority (ACA)
and Australian Commission and Competition
Commission (ACCC)
The Governor-General
Not more than
5 years
Budgetary
Department of Communications and the Arts None
Austria: Telecom Control (TKC)
The Government
5 years
Industry fees
Legislature (and Federal Ministry for Science None
and Transport)
Belgium: Belgian Institute for Postal Service
and Telecommunications (BIPT)
The Minister of
Telecommunications
6 years
Fees
No reporting responsibility except publishing None
an annual report
Canada: Canadian Radio Television and
Telecommunications Commission (CRTC)
The Governor in Council
5 years
Fees
Department Industry Canada (and the
Legislature)
The Governor in Council
Czech Republic: Czech Telecommunications Office
(CTO): as a part of the Ministry of Transport
and Communications
The Minister of Transport
and Communications
Indefinite
Budgetary
Ministry of Transport and Communications
None
Denmark: National Telecom Agency (NTA)
The Minister of Research
and Information Technology
Indefinite
Fees and budgetary
Ministry of Research and Information
Technology
Telecommunications Complaints Board
and Telecommunications Consumer Board
Finland: Telecommunications Administration Centre
(TAC)
The President
Indefinite
Industry fees
Ministry of Transport and Communications
None
France: Autorité de la régulation des
Télécommunications (ART)
The President (commissioners are 6 years
appointed by the President and
the Legislature)
Budgetary
Annual report to the Government and the
Legislature
None
Germany: Regulatory Authority for Telecommunications The President
and Post (Teg TP)
5 years
Industry fees
and budgetary
Legislature every two years
None
Greece: National Post and Telecommunications
Commission (EETT)
The Minister of Transport
and Communications
5 years
Industry fees
Ministry of Transport and Communications
None
Hungary: Communications Authority
The Minister of Transport,
Communications and Water
Management
Indefinite
Industry fees
Ministry of Transport, Communications and
Water Management
The Minister
Ireland: Director of Telecommunications Regulation
(ODTR)
The Minister of Public Enterprise
Indefinite (can only Industry fees2
be removed by
the Parliament)
Ministry of Public Enterprise
None
ANNEX F
229
Regulator appointed by
Term of office
Financing Source
Italy: Autorita Garante nelle Communicazioni (AGC)
The Prime Minister
(commissioners are appointed
by the legislature)
7 years
Budgetary (plan
No reporting responsibility except publishing None
to collect industry fees) an annual report
Japan: Ministry of Posts and Telecom (MPT)
–
–
Budgetary
–
None
Korea: Korea Communications Commission (KCC)
The President
(a semi-independent body in the Ministry of Information
and Communication – MIC)
3 years
Budgetary
–
None
Mexico: Comisión Federal de Telecomunicaciones
(COFETEL), decentralised body of the Ministry
of Communications and Transports
No fixed term
State budget
No reporting responsibility except publishing The Minister or a representative designated
an annual report
by the Minister
4 years
Industry fees
Annual report to the Ministry of Transport,
Public Works and Water Management
None
Budgetary
(Outcomes monitored by the Government)
None
President of Republic (upon
advice of the Minister of
Communications and Transports)
Netherlands: Independent Post and Telecommunications The Minister of Transport, Public
Authority (OPTA)
Works and Water Management
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
New Zealand: Commerce Commission (competition
authority)
The Minister of Commerce
Norway: Norwegian Post and Telecommunications
Authority (NPT)
The Government
Indefinite
Industry fees
Ministry of Transport and Communications
The Norwegian Telecommunications Appeals
and Advisory Board. Ministry of Transport
and Communication (matters of political or
fundamental importance)
Poland: Ministry of Post and Telecommunications
–
–
Budgetary
–
None
Portugal: Instituto das Comunicaçoes de Portugal (ICP) The Council of Ministers
3 years
Industry fees
Ministry of Equipment
The Minister
Spain: Comisión de Telecomunicaciones (CMT)
The Government. Needs approval
from the Parliament.
5 years
Industry fees3
Ministry for Development (General
Secretariat for Communications)
None
Sweden: National Post and Telecom Agency (NPTA)
The Government
6 years
Industry fees3
Annual report to the Ministry of Transport
and Communications
None
Switzerland: Communications Commission (ComCom), ComCom: the Federal Council
and Federal Office for Communications (OFCOM)
OFCOM: the Minister
4 years
Indefinite
ComCom: Industry fees ComCom: Annual report to the Federal
None
OFCOM: Industry fees Council (Confederation’s executive). OFCOM
and budgetary
provides information on its management
of the sector to the Ministry of Environment
and Transport
Turkey: Ministry of Transport and Communications
–
–
Budgetary
–
United Kingdom: Office of Communications (OFCOM)
The Minister of Trade and Industry 5 years
Industry fees
Ministry of Trade and Industry
Monopolies and Mergers Commission
United States:4 Federal Communications Commission
(FCC)
The President. Needs to be
confirmed by the Senate
Industry fees
and budgetary
Legislature
None
5 years
None
– Indicates no information available.
1. In most countries, the independent regulator’s decision can be overruled through a court decision. However, in many countries, while the court can nullify the decisions of the independent
regulator, it cannot impose a new decision on the issue.
2. Periodical contribution by operators.
3. Periodical contribution by operators based on turnover.
4. Entries for the United States only reflect telecommunications regulation at the federal level.
Source: Gönenç et al. (2001). STI DSTI/ICCP/TISP(99)15/Final.
ANNEX F
230
Reports to
Decisions can be overturned by1
Country/regulator
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ANNEX G
Independent Regulatory Agencies in the Electricity Supply Industry (ESI)
Scope
Board members
Length of terms
Possibility of
renewal
Staff approx.
(1999)
Budget1
Main source of financing
Main functions
Australia
Energy, telecoms
and airports
7
Up to 5 years
Yes
370 (11 deal
with electricity)
31.5
Treasury’s budget
Network regulation; wholesale market
rules; antitrust
Canada
Electricity, gas and
oil
9
7
Yes
280
19
Annual fees paid by the regulated
companies (based on the volume
of activity)
Regulation of electricity exports
Finland
Electricity
1
Indefinite
–
10
0.9
Supervision and permit fees on network Licensing of network activities; network
activities
price regulation (ex post)
France
Electricity
6
6
No
80
3
Main budget: Budget proposed to
the Ministry of Energy by the regulator
Grid and distribution Network access
Ireland
Electricity
1 (could increase
up to 3)
Up to 7
Yes, one time
n.a.
n.a.
Paid by electricity undertakings (to be
determined)
Network regulation, access and pricing
of the grid licensing, advise on purchase
of external electricity producers
Italy
Electricity and gas
3
7
No
80
9.7
Tax on utilities revenue not to exceed
1 per thousand of regulated industry
income
End user tariffs; network regulation
Mexico
Electricity and
natural gas
5
5 years
Yes
139 (2004)
10.6 million euros Public funds
(2004)
Grants, administrates and revokes
permits for the electricity, LPG
and natural gas industries in accordance
with law. Oversees the compliance
of the permit-holders with the regulatory
framework, approves contracts
and agreement models. Issues directives
and official standards. Sets ceilings for
gas prices. Participates to price-setting
in the electricity sector (MOF in charge).
Applies sanctions and resolves disputes
ANNEX G
231
ANNEX G
232
Norway
Scope
Board members
Length of terms
Possibility of
renewal
Staff approx.
(1999)
Budget1
Main source of financing
Main functions
Water and energy
(electricity)
1
6 years
Yes
400 (60 electricity
regulation)
35
Public funds
Issues regulations, licences
and monitors the energy market,
and monopoly operations of energy
companies
End user tariffs
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
Portugal
Electricity
3
5
Yes
42
3.1
Surcharge on transmission tariffs
Spain
Electricity, gas
and oil
9
6
Yes, one time
118
6.5
Surcharge on consumption not to exceed Approves Mergers and Acquisitions
0.5 per thousand of electricity revenue
of transmission and distribution
companies
Sweden
Electricity
1
Indefinite
–
2
2
2
End user tariffs; licensing
United Kingdom
Electricity and gas
1
5
Yes, one time
233 (97)
21
Charge on the income of the regulated
parties
End user tariffs, licensing
United States (FERC) Electricity, gas and
oil
5
5
Yes
1377 (97),
ESI only 470
154
Fees for services (e.g. filing fees) and
annual charges on utilities
Rules for interstate electricity sales
and transmission; transmission
and wholesale tariffs; overseeing
mergers
1. Approx., million USD, year 1997).
2. Integrated within the Swedish National Energy Administration which employs about 160 staff and has an annual turnover of about 1 million SEK.
Source: Adapted from IEA, Regulatory Institutions in Liberalised Electricity Markets (2002). Data as collected by the IEA in 2000-01 and released in the report. Updated by the Secretariat for
France Mexico and Norway.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
ANNEX H
Independence of Banking Supervisors, Selected OECD and Latin American Countries
Name of institution and sectoral
responsibility
Regulatory powers
Budgetary autonomy
Appointment of head and accountability
Power to grant and withdraw licenses
and specific issues related to degree
of autonomy
Countries with Banking Supervision in Central Bank
Czech Republic
Banking Supervision Department,
CNB has the legal authority to specify
Budget allocation made from CNB.
Czech National Bank, commercial banks, prudential regulations within the confines
foreign banks branches and persons other of the banking Law.
than banks licensed under separate acts.
Bank governor and vice governors
(the board) appointed by the president.
The head of banking supervision is
appointed by the board of directors and is
accountable to the board.
Italy
The Bank Supervisory Department, Bank
of Italy. Commercial banks and financial
institutions.
The Minister of the treasury issues
Budget allocation made
ordinances on supervisory measures.
from consolidated budget
The Bank of Italy may propose prudential of the bank of Italy.
measures.
The governor of the bank is appointed with The Bank of Italy has the power to grant
a resolution of the Bank of Italy’s executive and withdraw licences.
board in agreement with the president and
prime minister. The governor is accountable
to the administrative courts.
The Netherlands
Banking Supervision Department,
the Nederlandsche Bank (DNB).
Commercial Banks
Within the confines of the law
Supervisory budget comes
The president of the DNB is appointed by
on supervision, the DNB has the power
from fees levied on the supervised royal Decree. The president is accountable
to issue prudential regulations. Banks are institutions.
to the relevant committees of parliament.
consulted when drafting regulations.
In some cases, coordination
with the Ministry of finance is required.
CNB issues and revokes licences.
Poland
General Inspectorate of Banking
Supervision (GINB), executive agency
of the Commission for Banking
Supervision, separate entity
in the National bank of Poland (NBP).
Commercial banks, cooperative banks
and reprehensive offices of foreign
banks.
The GNBI has the power to issue
prudential regulations for the banking
system.
The CBS, in agreement with the minister
of finances, issues and revokes licences.
Operating budget of the NBP.
Chair of CBS is the president of the NBP
who is appointed by the lower chamber
of Parliament at the request of the
president.
CNB needs to request the opinion
of the minister of finance prior to granting
or revoking a license.
ANNEX H
233
ANNEX H
234
Name of institution and sectoral
responsibility
Regulatory powers
Budgetary autonomy
Appointment of head and accountability
Power to grant and withdraw licenses
and specific issues related to degree
of autonomy
Countries where supervision is located in Ministry of Finance
Austria
Federal Ministry of Finance (FMF). All
domestic banks and branches of foreign
banks.
The FMF is the sole issuer of rules
and regulations.
The budget for supervision is part The Minister of Finance has ultimate
of the FMF budget. Fees from
responsibility in supervisory matters.
the industry are used for specific
occasions (like the appointment
of a state commissioner
for a specific bank).
The FMF, as the supervisory authority has
the sole power to grant and withdraw
licences. The recently revised banking act
has provided the Austrian National Bank
(ON) with some supervisory duties. The ON
can be called upon to carry on-site audits
in specific cases or to prepare expert
opinions for the FMF.
Countries where supervision is a separate agency
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
Australia
Australian Prudential Regulation Authority APRA has power to issue prudential
(APRA). Authorised deposit taking
standards for ADIs and NOHCs.
institutions (ADIs) including
non-operating holding companies of ADIs
(NOHC).
The source of funding is
an industry levy paid into
consolidated revenue.
CEO and board are appointed
by the treasurer and are accountable
to the commonwealth parliament.
APRA grants and revokes licences.
Belgium
Commission for Banking and Finance
(CBF) commercial banks and capital
market operators.
The banking Law empowers the CBF
to issue prudential regulations.
CBF’(s budget is funded by fees on
financial market operations and
charges on registered credit
institutions and investment firms.
However, its size is determined
by the ministry of finance.
President is appointed by the government.
He presents the annual report
to the parliamentary commission
for financial matters (this is a practice
introduced by the CBF president, but not
stipulated in the law).
CBF has full autonomy in granting
and withdrawing licenses.
Canada
Office of the Superintendent of Financial
Institutions.
Banking insurance, non bank deposit
taking institutions.
OSFI derives its power from the OSFI Act Asset or premium-based
(1997). Within the constraints of that Act, assessments and supplementary
OSFI issues guidelines, policy statements, user pay assessments.
and bulletins to provide additional
guidance to supervised institutions.
The superintendent reports directly to the
minister of finance. The minister of finance
officially heads the OSFI and, thus, carries
ultimate responsibility. The superintendent
is given a degree of operational
independence however, s/he maybe
removed from the office for just cause
by the Governor in Council.
The minister of finance is responsible
for granting and revoking license. The OSFI
is considered as an independent authority
in supervisory matters, but the ministry
of finance is heavily involved at the policy
level. It may reverse actions of the OSFI,
including the taking control over
institutions.
Chile
Superintendency of Banks and Financial
Institutions (SBIF), Banco del Estado,
banks, financial institutions and
companies issuing or operating
credit cards or similar systems.
The central Bank of Chile has the authority Superintendency is funded from
to issue prudential regulations. The SBIF fees from supervised entities.
carries out inspection and supervision.
Superintendent is appointed by President
of the Republic. SBIF is subject to control
of the Republic’s Comptroller Office
with respect to all aspects related
to the examination of its accounts.
SBIF issues and revokes licenses.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
Power to grant and withdraw licenses
and specific issues related to degree
of autonomy
Name of institution and sectoral
responsibility
Regulatory powers
Budgetary autonomy
Appointment of head and accountability
Finland
Financial Supervision Authority (FSA)
operating in connection with the Bank
of Finland and the Ministry of Finance
Banks, brokerage, firms, stock and
derivatives exchanges and management
companies for mutual funds.
FSA issues regulations to the supervised
entities concerning the observance
of the applicable regulations, and issues
guidelines that are necessary
for purposes of supervision. Regulatory
autonomy is limited however.
Operating costs are covered
by supervision fees and specific
fees paid by supervised entities.
The President of the Republic appoints
The MOF has the responsibility for licensing
the director general of the FSA
and revocation of a credit institution’s
on recommendation of member
licence.
of the Parliamentary Supervisory Council
(PSC). The FSA is accountable to the PSC
only with respect to administrative matters.
France
AMF.
Germany
Bundesaufischtsamtfür das Kreditwesen
(BfC) Commercial banks.
The Bundesbank has some supervisory
powers from a market-stability point
of view.
Hungary
Hungarian Financial Supervisory
Authority (HFSA) National Bank
of Hungary (NBH). All organizations
engaged in financial services,
supplementary financial services, clearing
house activities, investment and fund
management activities, commodity
exchange transactions, insurance
and private pension funds.
Japan
Financial Services Agency (FSA).
Banks, securities companies, insurance
companies and other private sector
financial institutions.
BfC is an independent federal
BfC reports to the MOF but must keep close
agency under the auspices of
contact with the Bundesbank.
The Law sets out a detailed framework.
the MOF. BfC has no own budget.
The BfC publishes “interpretations”
Banks pay fees to the government
and “guidelines” which can be seen
and these fees form 90 per cent
as having a regulatory power, but they are of the government budgetary
not binding.
allocation for BfC.
The HFSA has no regulatory powers
but can issue recommendations
and guidelines. Even though these
recommendations are legally not binding,
they “make the application of the law more
predictable”.
Law empowers FSA to issue regulations.
BfC is the licensing authority.
The institutional setup between BfC
and the Deutsche Bundesbank is currently
under discussion.
The HFSA is funded by fees from
the supervised entities. The level
of the fees is determined by law.
The HFSA is autonomous as far as
staffing and salary level are
concerned.
The president of the HFSA is appointed
by parliament based on the proposal
by the prime minister. He is accountable
to the parliament and the government.
Budget allocation is made from
the government’s budget.
The head of the agency is the commissioner, FSA is the licensing authority.
appointed by the Priem Minister with
the consent of the Diet. The Commissioner
is accountable to the cabinet office. The FSA
is considered an external organ
of the cabinet office.
The authority of the HFSA in granting
and withdrawing licenses is complete
for nonblank financial institutions.
For banks, the HFSA has to request
the opinion of the NBH in case of licensing,
and for withdrawing a license of the NBH
and the MOF.
ANNEX H
235
ANNEX H
236
Name of institution and sectoral
responsibility
Regulatory powers
Budgetary autonomy
Appointment of head and accountability
Power to grant and withdraw licenses
and specific issues related to degree
of autonomy
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
Korea
Financial Supervisory Commission (FSC) All legislation relating to the financial
and Financial Supervisory service (FSS). sector is drafted and submitted
Banks and other financial institutions.
by the Ministry of Finance and Economy
but must be done in consultation with
the FSC.
Operating funds come from
contributions from the Bank
of Korea (BoK), the government,
and fees by financial entities under
FSS supervision, and fees
for services rendered by the FSS
in respect of issuance
of marketable securities.
Annual fees on financial
institutions are based on their total
liabilities.
The FSC consists of up to nine members
FSC has the authority to issue and revoke
appointed by the President of Korea.
licenses to financial institutions. FSC is also
The Chairman of the FSC is the Governor
in charge of financial sector restructuring.
of the FSS and is accountable
to the government. The FSC is placed under
the office of the Prime Minister; however
the FSC performs its duties independently
of any government organization.
Mexico
National Banking and Securities
Commission (CNBV).
Banks, securities market, non-banking
and non-securities sectors.
Power to sanction firms and to investigate
and punish unfair behavior such
as insider trading. Power to issue
complementary regulation for financial
institutions.
The CNBV is a decentralized
agency of the Ministry of Finance
with technical autonomy and
executive powers defined by law.
Funding comes from fees levied
on the regulated industry,
but the agency’s budget
is allocated by the Ministry
and does not necessarily
correspond to the fees collected.
Agency enjoys partial exemptions
on staffing policies.
The President is appointed by Minister
of Finance and designates two
Vice-Presidents; other members
of the board are designated by the bodies
they represent. The length of the term is not
fixed and the President and other board
members are dismissible at
the appointer’s will.
The President is accountable to the board of
Governors and to the Ministry of Finance.
Agency submits an annual report
to the Congress through the Minister.
Agency grants and revokes licenses only
for credit unions operations and
for collective investment schemes.
Main licences granted by the Ministry
of Finance, after the technical advice
of the CNBV.
Norway
Banking, Insurance and Securities
Commission (BISC).
Banks, finance, mortgage, and insurance
companies; pension funds, securities
trading, stock exchanges and authorized
market places, estate agents, debt
collection, external accounting services
and auditing activities.
Power to give recommendations
to the Ministry of Finance on licensing.
Only limited power to grant licenses
for selected activities (investment firms,
financing companies, investment
brokers). Possibility of sanction
for forbidden behaviour (insider trading,
market manipulation and unreasonable
business methods). Receives complaints
from consumers but cannot settle
disputes.
The BISC is an independent
financial regulator under
the Ministry of Finance.
Funding comes from fees levied
on financial institutions
as approved by the Ministry
of Finance.
Agency enjoys partial exemptions
on staffing policies.
Board and Director General are appointed
by the King. The length of term is four years
for the former and six years (renewable
once) for the latter.
Agency cooperates with the Central Bank
and reports to the Ministry of Finance.
Power to give recommendations
to the Ministry of Finance on issuing
and revoking licenses. Only limited power
to grant licenses to investment firms,
financing companies, and investment
brokers.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
Name of institution and sectoral
responsibility
Regulatory powers
Budgetary autonomy
Appointment of head and accountability
Banking law and various other laws give
the FSA the power to issue prudential
rules and regulations.
FSA funding is from government
budget appropriations.
The Government levies charges on
the supervised entities.
The Ministry of Finance approves
FSA’s budget.
Board is appointed by the Ministry
of Finance. The Director General is also
the chairman of the Board and is
accountable to the Ministry of Finance.
Power to grant and withdraw licenses
and specific issues related to degree
of autonomy
Sweden
Swedish Financial Supervisory Authority
(SFSA).
Banks, mortgage, finance, and insurance
companies.
Switzerland
Federal Banking Commission (FBC).
The FBC issues the decisions necessary
Banks, securities dealers, and investment to enforce the present law and supervises
fund business.
compliance with legal requirements.
The FBC is very active in issuing
“Circulars” to all market participants
in connection with the application
of specific legal regulations or reporting
requirements. Legal powers are limited.
The expenses and revenues
of the FBC are governed
by the regulations issued
for the budgets of the federal
government. Emoluments fixed
by the federal Council cover
the expenses. The FBC has limited
discretion in setting
the remuneration of its staff
compared to Federal employees.
Federal Council appoints the Commission’s The FBC has the power to grant and revoke
licenses. The Decisions of the FBC can be
Chairman.
appealed to the Federal Court.
The FBC reports annually to the Federal
Council, via the Federal Department
of Finance.
United Kingdom
Financial Services Authority (FSA).
Banks and investment business.
FSA has its own budget, which
it consults on with the industry.
FSA levies fees. FSA is a “private
company limited by guarantee”.
FSA has autonomy in staffing.
Chairman and Board of FSA are appointed
by and dismissible by the treasury
(appointment is for no fixed term).
Parliament conducts “confirmation”
hearings, although not on a statutory basis.
The Chairman is directly responsible
to Parliament for banking supervision.
FSA is empowered to grant or revoke
licenses to conduct financial services
business. Its decisions may be appealed
to a specialist tribunal.
United States
Federal Deposit Insurance Corporation
(FDIC).
State banks nonmembers, industrial
banks, saving banks, foreign bank
branches state and federally licensed.
Chairman and members of the Board
of Directors, appointed by President,
and confirmed by the Senate. The heads
of the OCC and OTS serve on FDIC board.
The FDIC does not grant charters (licenses)
and cannot revoke them, but it must
approve all banks for deposit insurance and
can remove insurance coverage without
approval of other agencies, the US treasury,
of the White House.
Comptroller of the currency is appointed
by the President and confirmed
by the Senate.
OCC has independence on granting
and revoking licenses.
The FSA is empowered to make
regulations within its field of competence.
The FSA enjoys broad discretion
in the exercise of these powers, although
they must be exercised consistently
with its statutory objectives.
Federal regulatory agencies can issue
FDIC is an independent agency
prudential regulations within the confines created by Congress.
established by law.
Funding comes from premium that
it charges on insurance. FDIC has
full autonomy in terms of staffing,
salaries, and other budgetary
matters.
Comptroller of the Currency (OCC).
Same principles as above.
“Independent” bureau of the US
National banks and foreign bank branches
Treasury.
federally licensed.
Funding comes through
assessment on the banks. OCC
has discretion in staffing
and salaries.
FSA has full autonomy to grant and revoke
licenses.
Source: Quintyn Taylor (2002), IMF Working Paper, completed by the Secretariat for Norway, France and Mexico.
ANNEX H
237
ANNEX I
ANNEX I
Possibility of Appeals after Decisions Led or Instructed
by Selected Regulatory Agencies
Possibility of recourse to amparo
Economic sector and name
of the regulatory agency
Administrative Administrative
appeal to
trial
Indirect
Direct
Available information
on proceedings filed against
Directly
to the District the measures decided
court judge by the agency (as of May 2004)
Telecommunications
Federal Telecommunications
Commission (COFETEL)
Line Minister
No
Yes
Yes
Yes
496 out of the 607 proceedings
since 1996 were amparos,
of which 78 are still pending.
COFETEL lost around 45%
of amparos.
Agency
Yes
Yes
Yes
Yes
Between 2003 and 2004,
176 amparos were filed, of which
14 were resolved. CRE won 11 and
lost 3. 162 are still pending.
Agency
Yes
Yes
Yes
Yes
3 753 amparos filed since 1996,
of which 1 614 are still pending.
Conagua won 84% of the amparos
already resolved (1 807 out
of 2 139).
Line Minister
Yes
Yes
Yes
Yes
1 543 amparos were filed between
year 2000 and May 2004.
726 were resolved and 817 are
still pending. 694 amparos were
resolved favourably
to the interests of the CNBV.
Agency
Yes
Yes
Yes
Yes
420 amparos between 1998
and 2002. Around 57% were filed
while the Commission
proceedings were pendent, while
43% were filed as challenges
to the final Commission
determinations.
Energy
Energy Regulatory
Commission (CRE)
Water
National Water Commission
(Conagua)
Finance
National Banking
and Securities
Commission (CNBV)
Competition
Federal Competition
Commission (COFECO)
Source: OECD Secretariat based on a specific questionnaire addressed to supervisory bodies, supplemented by
DAFFE/COMP(2004)1/REV1 for the competition agency.
238
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
ANNEX J
ANNEX J
Figure on the Circuit for Appeals and Judicial Review
SUPREME COURT OF JUSTICE
LINE MINISTER
Option 1:
Appeal to
line Minister:
When the regulatory
authority is not
independent
(ex: COFETEL)
DISTRICT COURT JUDGE
Indirect amparo
Direct amparo
The Supreme Court
may engage itself
on direct amparo
cases to the Federal
District Courts and
Courts of Appeal,
when these cases
raise significant
constitutional issues
COLLEGIATE
CIRCUIT COURT
“ amparo contra leyes”
Track A: administrative appeal
Direct amparo
Option 2:
Appeal to the
regulatory authority
itself: when the
authority is
independent
Track B: contentious/
administrative trial
FEDERAL FISCAL
AND
ADMINISTRATIVE COURT
REGULATORY AUTHORITY
Initial decision
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
239
ANNEX K
ANNEX K
Objectives and Powers of the Mexican Regulatory
Agencies
Name of the regulatory
agency
Missions, objectives
Powers
Federal Telecommunications
Commission (COFETEL)
Assure the development of telecommunication
infrastructures in order to enhance economic
growth, social development and national
integration; improve quality and efficiency
of the telecommunication services to enhance
competition and productivity of national economy;
set the conditions necessary to guarantee free
competition and private investment
in the telecommunications system.
Oversees that terms and conditions included within each
concession/license/permit are honoured by all participants in
the market and that smooth transition to competition-based
telecommunication policy occurs. Propose sanctions to line
Ministry for those companies violating norms. General
advisory powers to line Ministry, including on the granting
and revoking of licenses and permits. General
(administrative) rule-making powers. Settles disputes
between regulated firms in some specific cases.
National Water Commission
(CNA/Conagua)
Formulate the National Hydraulic Programme,
advise the government on matters related to water
use, promote the development of drinking water
and sewage systems, facilitate users’ access,
preserve and control the quality of national waters,
directly and indirectly manage the federal
hydraulic infrastructures.
Manages and custodies the national waters in Mexico.
Grants concessions or assignment titles for use, profit and
exploitation of national waters. Provides technical support.
Sets standards on hydraulic matters. Mediates in conflicts
related to water at users’ request. Carries out and promotes
researches on water-related issues. Supervises
the enforcement of law and imposes fines. Executes fiscal
attributions related to water.
National Banking
and Securities Commission
(CNBV)
Supervise and regulate financial entities to
Supervises financial activities, issues prudential regulation
guarantee their stability and a smooth functioning in accordance with its mandate, gives advices to federal
of the financial system for the public interest.
Government in matters related to finance, authorises
constitution and activities of financial bodies, orders
suspension of operations, investigates, imposes
administrative sanctions, issues reports on financial
markets, manages the contacts with foreign institutions with
a similar mandate.
Energy Regulatory
Commission (CRE)
Achieve the efficient development of the energy
sector to benefit industrial, commercial
and residential users, by combining regulation
of natural and legal monopolies.
Grants, administrates and revokes permits for electricity,
LPG and natural gas industries in accordance with law.
Supervises the compliance of the natural gas and electricity
permit-holders with the regulatory framework, approves
contracts and agreement models. Issues directives
and official standards. Sets maximum tariffs for natural gas
distribution and open access pipeline systems. Participates
in the price-setting process for the electricity sector,
for which the Ministry of Finance is ultimately responsible.
Applies sanctions and resolves disputes.
Source: OECD Secretariat based on a specific questionnaire addressed to supervisory bodies.
240
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
ANNEX L
ANNEX L
Telecommunication Regulators:
Regulations on Universal Services
Universal
service
framework
Existence
of funding
mechanism
Cost
finding
Cost
allocation
Australia
Yes
Yes
R
M
Austria
Yes
Yes
Belgium
Yes
Yes
R
R
Canada
R
R
R
R
Czech Republic
No
–
–
–
Denmark
Yes
Yes
R
R
Notes
The costs of the USO are shared in proportion to the carriers’
shares of “eligible revenue”. After obtaining the consent
of participating carriers, the Minister may specify another
cost-sharing mechanism.
If it is proved that a deficit exists in the provision of universal
service, the NTA will collect a contribution from fixed voice
telephony service providers on the basis of the amount
of turnover.
Finland
No
–
–
–
France
Yes
Yes
M (R)
M (R)
Germany
Yes
Yes
R
R
Greece
Yes
Yes
M (R)
M (R)
Hungary
No
–
–
–
No universal service regulation in the telecommunication
law.
Iceland
Yes
No
–
–
Direct subsidy from government. Cross subsidy between
services.
Ireland
No
–
–
–
Italy
Yes
Yes
R
R
Japan
Yes
No
–
–
Korea
Yes
Yes
M
M
Luxembourg
Yes
Yes
ART proposes the assessment of the cost of the universal
service and the level of operators’ individual contributions
to the Ministry.
While there is a legal provision for a universal service
funding mechanism, it has not been applied yet.
Regulator implements Ministry’s decision.
According to the NTT law, NTT’s voice telephony service is
regulated as universal service.
Mexico
Yes
No
–
–
Subsidy from access charges.
Netherlands
Yes
Yes
R
R
While there is a legal provision for a universal service
funding mechanism, it has not yet been applied.
New Zealand
See note
–
–
–
The Kiwi Share Obligations are in effect a type of universal
service requirement. Public disclosure of Kiwi Share costs
are required from January 2000. Interconnection charges
contribute to any such costs.
Norway
Yes
No
–
–
Incumbent bears USO based on its licence requirement.
Poland
Yes
No
–
–
Establishment of the universal service fund is predicted
in the draft of new telecommunication law.
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
241
ANNEX L
Universal
service
framework
Existence
of funding
mechanism
Cost
finding
Cost
allocation
Portugal
Yes
Yes
R
R
The criteria for the division of the net costs of universal
service between operators and providers that are obliged
to contribute are defined and published by ICP.
Spain
Yes
Yes
R
R
Telefonica has been designated the dominant operator
required to provide universal service until end 2005.
Sweden
Yes
No
–
–
Universal service being provided through a licence condition
on dominant carrier.
Switzerland
Yes
Yes
–
–
Universal service licence granted on a periodic basis by
tender. If a need for funding is noted, the granting authorities
(ComCom/OFCOM) can impose a fee on companies
with a licence.
Notes
Turkey
Yes
No
–
–
Cross subsidy between services.
United Kingdom
Yes
No
–
–
Universal service provision is an obligation on British
Telecom and Kingston Telecom.
United States
Yes
Yes
R
R
Each telecommunications carrier that provides inter-state
telecommunications services must contribute,
on an equitable and non-discriminatory basis,
to the provision of universal service.
Source: Gönenç et al. (2001). STI DSTI/ICCP/TISP(99)15/Final.
242
OECD REVIEWS OF REGULATORY REFORM: MEXICO – ISBN 92-64-01750-X – © OECD 2004
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Questionnaire qualité PAC/PROD, Division des publications de l'OCDE
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Title: OECD Reviews of Regulatory Reform: Mexico
ISBN: 92-64-01750-X OECD Code (printed version): 42 2004 11 1 P
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(42 2004 11 1 P) ISBN 92-64-01750-X – No. 53665 2004
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