Photo credit: The power of television by Clemens v. Vogelsang
A couple of weeks ago, I wrote about the titanic tasks that the Mexican telecom regulator had to achieve according to the recent constitutional telecom reform. One of those tasks was to declare preponderant operators for telecom and broadcasting, and imposing asymmetric regulation or ordering separation and/or disinvesting. Despite the markets were nervous, the later did not happen. Televisa, Telmex, and many of their strategic partners, are on two legs, with regulation, but on two legs.
The asymmetric regulation cover many aspects in detail, so I plan to write about consequences and opportunities later in many posts. Nevertheless, here is a nutshell summary of what was resolved, and that took affects last March 21:
1. Televisa, some of its subsidiaries, re-broadcasters and partners, were declared preponderant, and subject to the regulation (jointly Televisa).
2. Televisa must have a public offer to allow broadcasters access to passive infrastructure under the principles of no discrimination and no exclusivity.
3. Public offer will cover every new civil construction.
4. Televisa cannot acquire relevant content on an exclusive basis. Televisa cannot join buyer´s clubs. IFT will determine what content must be considered relevant by May 31, 2014, and every two years thereafter.
5. Televisa must offers its channels to competitors of other technologies operators (CATV, VOD, etc.)
6. Televisa cannot invest on Telmex, or have shared directors or high executives.
7. IFT will review and revise the regulation every two years, and could apply, as necessary, functional or structural separation, disinvesting of assets.
1. Telmex and some of its subsidiaries and partners, were declared preponderant, and subject to the regulation (jointly Telmex).
2. In mobiles, Telmex is bound to interconnect, sell capacity and render transport and termination of calls, as well as co-location. This includes access to passive wholesale and MVNO.
3. In mobiles, Telmex is bound to provide tariff information to end-users, customer service, unblocking of phones and elimination of national roaming. Exclusive agreements for distributing mobile phones cannot be longer than 6 months.
4. In fixed service, Telmex is bound to render interconnection, allow passive infrastructure, co-location and transport. Telmex must guarantee minimum speeds and delivery times for T1s and other connections.
5. In mobiles and fixed service, Telmex must allow access to any content/service/app.
6. In mobiles and fixed service, must have a public offer to allow access to passive infrastructure under the principles of no discrimination and no exclusivity. Public offer will cover every new civil construction.
7. Telmex must unbundle its local loop.
8. Telmex cannot acquire relevant content on an exclusive basis. IFT will determine what content must be considered relevant by May 31, 2014, and every two years thereafter.
9. Telmex cannot invest on Televisa, or have shared directors or high executives.
10. IFT will review and revise the regulation every two years, and could apply, as necessary, functional or structural separation, disinvesting of assets.
The analysis of the legal process deserves another post, as IFT has a complex dual function as regulator and competition authority, and therefore is subject to two different process laws that requires surgeon hand to operate. It also would requiere STEM lawyer skills to make a successful challenge.
This is a new beginning for the Mexican telecom industry, but it is a good start for planning telecom business strategies.
Do you think this was enough, or something essential was left out? Let me know.
Photo credit: When in Mexico, you can’t beat Pemex gas by diaper
Mexico Moment (#MEMO) is being fuelled by structural reforms that promise open markets in telecom, energy, finance and infrastructure. Now all three major political parties, academics and NGOs are publicly discussing their proposals to energy reform, and PEMEX is the centre of the debate. All of them agree that PEMEX needs an overhaul. Thus, we need to talk about PEMEX.
What are the Parties proposing?
President Peña Nieto comes from the PRI (Partido Revolucionario Institucional), which has been the ruling party for most part of Mexico´s modern history. The PRI has declared that will fully Peña Nieto´s bill for a constitutional reform upgrading PEMEX. This proposal pretends to keep PEMEX state-owned, reduce its subsidiaries from 5 to 2, allow production-shared agreements with private companies and reduce its taxes to promote reinvesting.
On the other hand, Partido Acción Nacional (PAN), a centre-right party proposes a constitutional reform, too. In that reform, PEMEX keeps current wells and next ones will be bid, with participation of PEMEX and private companies. This proposal also pretends to open refining, petrochemicals and transport to private companies.
Finally, Partido de la Revolución Democrática (PRD), a centre-left, proposes amendments to secondary legislation only. This proposal pretends to reduce tax burden of PEMEX to allow it become a profitable State-owned company. The taxes paid by PEMEX and the savings would be used for research and development. Technology and services needed for shale and offshore drilling would be contracted with private companies through biddings, as long as PEMEX do not have capacity or technology.
Who owns Lazaro Cárdenas?
On 1938, President Lázaro Cárdenas nationalised the oil industry taking ownership over hydrocarbons. Since then, Cárdenas has been the icon of nationalism and oil independence. Cárdenas, a president from the PRI, is also shared with the PRD, a party that was founded by his son, Cuauhtémoc Cárdenas.
During the debates, both parties have been using Cárdenas legacy to support their own arguments. Cárdenas took decisions based on whole different circumstances and no pressure from globalization of the oil industry, though.
The Odds for Approval
Considering the numbers of the PRI at the House of Representatives (42% of 67% needed) and at the Senate (42% of 67% needed), it would be necessary to get support either from the PAN to secure the Reform, or from the PRD plus other minor Parties. However, it is possible that some congressmen from PAN and PRD vote in favour of PRI´s proposal not following their Parties proposals.
However, if you look closely at the proposed bills for Constitutional Reform and the Hidrocarbons Tax Law, you will find that PRI met both PAN and PRD in the middle, but still, devil is on the details.
Photo credit: Lightbulb Series 1 – 04 by Thomas IceSabre
A new energy reform proposal suggested by the President of Mexico could open up the market to foreign investment, if approved. President Nieto has presented a new bill which involves the restructuring of Pemex and proposes the end of the company’s monopoly. This state owned Oil Company has controlled the energy market in Mexico for almost seventy five years. However, it will require dramatic change to the constitution and significant restructure of the inefficient and controversy ridden Pemex.
Pemex has been firmly in their own comfort zone for many years will access to oil fields which were easy to tap. However, these oil fields are now drying up and the company lacks the technology, skills and equipment for exploration of deep water reserves or exploiting shale gas. Pemex’s output has been steadily decreasing over the last decade with production estimated at less than 75 percent of previous figures.
The company has struggled to run effectively and has been forced to use capital to pay annual tax burdens rather than investing in new technology, training or equipment. Unless new methods of production can be brought online quickly, Mexico may find herself in the position of becoming a net energy importer.
Foreign investment seems to be the key to resolving this issue, but it is a very risky political move. Mexico’s oil industry was nationalized in 1938 and many feel foreign investment may compromise Mexico’s independence. The new proposal has not suggested direct investment in the oil fields, but proposes private companies be permitted to bid for Pemex profit-sharing contracts. This approach could allow foreign investment into refining, transportation and petrochemical production, allowing them to work with Pemex rather than in competition.
Many believe this new proposal will allow the private sector to contribute to the energy sector and allow price reductions. This could further boost Mexico’s economy without releasing full control of her assets. Major foreign producers including Repsol, Chevron and Exxon have already expressed an interest in participating in this scheme.
The energy reform proposal needs congressional approval but it would represent a significant change in Mexican attitudes. Many experts believe that Pemex is struggling with outdated technologies and management issues which are severely limiting their potential. Investment capital from foreign companies could provide the opportunity for dramatic improvement which would be of great benefit to the Mexican economy.
This proposal represents a large political gamble for President Peña Nieto. He will require the support of both his party and the National Action Party in order to facilitate the plan going through Congress. Peña Nieto also wants the left wing to come. It would then need approval in at least seventeen of the thirty two state legislatures of the country. There is already significant opposition from two political parties and may struggle to convince the general population.
The Mexican people take a great pride in their nationalized energy industry and many will be against private investment especially from foreign companies. Peña Nieto has assured the people repeatedly that his plan does not involve privatizing the industry but will merely allow private companies to share a percentage of the oil discoveries. With the third biggest proven reserves in Latin America, this represents a significant investment opportunity.
Photo credit: Corona Extra by YEAH!!! Design
Ministry of Economy announced that, during first six months of 2013, direct foreign investment in Mexico (FDI) soared 2.5 times in respect to the same period of 2012, reaching a historic record of $23.8 Billion USD.
FDI was 58% for new investments, 24% for profit re-investments and 18% for inter-companies operations.
By sector FDI was: 83% in manufacturing; 8% in trade; 3% in construction; 2% in professional, scientific and technical; and 2% in transport, courier and storage. Remaining 2% to diverse.
By country was: 56% from Belgium, 23% from USA, 4% from UK, 4% from Japan and 4% from Netherlands; remaining 9% was disperse between 55 countries.
The unusual soar resulted from the AB Inbev-Modelo purchase. However, if this operation is taken off from the FDI number, there is still an increase of $11.5 Billion USD (10% increase).
With these numbers, Mexico confirm its appeal to international investors, but also shows interest of international corporations to merge Mexican-made enterprises. Will second have another merger on Mexican company and show higher numbers?
Many experts believe that Pemex or Petróleos Mexicanos the state owned oil monopoly is the jewel of Mexico. For years it has funnelled billions into state treasury funds for schools, highways, ports and hospitals. Yet, even with Pemex being credited for building the Mexican nation, officials have acknowledged that the inefficient company is in financial trouble. Officials have been quoted as saying that if the company is not opened up to foreign and private investment Mexico will find itself a net energy importer within the next ten years. This is quite a shocking revelation given that Mexico is currently in the top ten of the world’s largest oil producers.
As Mexico’s new president begins to establish his administration, he is looking set to create plans which will overhaul Pemex and meet with great political opposition. The reason behind this is that many Mexicans believe that the removal of foreign oil companies in the 1930’s allowed Mexico a sense of true independence. Some believe that allowing foreign investment back into the Mexican oil sector will allow greater powers access with their troops.
Experts are anticipating landmark legislation for energy reform, which should include proposals and policies addressing Pemex. Industry experts and government officials believe that advancements in technical expertise which will come from outside investment and companies is the only way to retrieve reserves of gas and oil from shale rock and deep water formations. These sources are estimated to contain over half of Mexico’s reserves totaling over seven billion barrels.
However, Pemex is currently not allowed to choose their associations which would reduce risk levels of deep water exploration. Pemex executives believe that the company needs flexibility and budget autonomy to be able to form joint ventures. This would require significant changes to the constitution and will be a politically sensitive battle for the government to instigate. Even mention of parties agreeing to reform by President Peña Nieto sparked fierce debate and argument about Mexico’s ability to remain independent from foreign interference.
However, even opponents of reform cannot deny the legendary problems associated with Pemex. The company’s past history of poor management decisions, corruption, huge union demands and inefficient corporate structure, it provides a business model of how an oil company should not be run.
According to a study from 2011, Pemex revenues per employee is a fraction of the oil giant BP and approximately half of the part state owned Oil Company from Brazil Petrobras. Even Pemex executives acknowledge that Mexico is decades behind industry standards regarding deep water exploration. They haven’t had the pressure to pursue riskier searches since there was an abundance of inland and shallow water oil. This meant that the engineers have not kept up with the technological advancements which are commonplace with competitors.
Mexico has a wide array of sources of energy which is almost as diverse as the United States. However exploiting them is too overwhelming for one single company. There is much speculation as to how the Mexican constitution could be amended to allow production sharing agreements, or if secondary laws will allow other opportunities of cooperation, or whether taxation will be reduced to allow investment and make Pemex more efficient, but until the discussion is not focused on solving the problems of Pemex, the obstacles are too great.