Mexico Telecommunications Reform: Too Good to Be True?

03/28/2013 11:33 am ET | Updated May 28, 2013

A long-awaited telecommunications reform, presented to Congress on March 11 by Enrique Peña Nieto, was passed swiftly by the lower house with relative few modifications to its ambitious scope and is now set to be approved by the upper house in an unthinkable development just a few months ago when, in the run up to the presidential election (in July 2012), social protests, loosely coordinated by the #YoSoy132 student movement, erupted against media bias in favor of the now ruling Partido Revolucionario Institucional (PRI). More in general, the telecommunications reform, coupled with other significant steps made by Peña Nieto's administration to advance its reform agenda in just a few months may reassure those who were skeptical of the president's willingness and ability to challenge powerful interest groups (including unions, state government and business lobbies) which had historically been part of the PRI support base. The president has proven a master in pragmatic politics, as many other PRI leaders in the past, reaching out to the opposition and brokering deals outside and before presenting bills in Congress. The "Pacto por Mexico", signed by the PRI and the main opposition parties Partido de la Revolución Democrática (PRD) and the Partido Acción Nacional (PAN) just a few days after the president took office created a cross-party platform for the passage of 95 key initiative where widespread agreement exists and a roadmap for the new government's reform agenda, which has so far progressed at an encouragingly brisk pace -- notably with the approval of a major education reform, a fiscal responsibility reform for state and municipal governments, a reform to the notoriously inefficient injunction law in the first 100 days of his administration.

Ticking another major box in the reform agenda

The telecommunications reform aims to tackle what has long been one of the main competitiveness constraints for the country, namely the below-par competition conditions in the telecommunications sector, which is worth around US $30 billion a year. The sector is currently dominated by three players: América Móvil, which is owned by Carlos Slim (the richest man in the world according to Forbes) and holds around 75 percent of the mobile and fixed telephone market, plus Grupo Televisa and TV Azteca in the broadcast market (with market shares of 60 percent and 30 percent respectively).

Limited competition and the resulting high prices by international comparison (mobile and broadband services being 26 percent and 31 percent higher respectively than the OECD average) have hindered a more aggressive telephony uptake, especially among the poorest segment of the population, concentrated in rural areas. This has left Mexico with one of the lowest telecoms penetration rates in the OECD (with estimated mobile telephony and broadband services penetration rates at 88.9 and 12.8 percent in 2012, respectively) and a significant digital divide. Moreover, limited competition has resulted in poor telecoms infrastructure. Considering that a recent OECD study estimated the welfare loss associated with the inefficiencies in the telecoms market amounted to US $129.2 billion in 2005-09 -- an annual average of US $25 billion (1.8 percent of GDP) -- and consumer overcharges accounted for 52 percent of that welfare loss (the remainder deriving from unrealised subscriptions), one can see the tremendous impact the reform could have in catalysing growth. Indeed, according to the minister of finance, Luis Videgaray, the reform, once implemented, could add up to 1 percentage point to annual growth.

But what about the implementation?

Its ambitious scope suggests that the proposed reform could be game-changing, as well as confirming Peña Nieto's apparent willingness to challenge Slim and business lobbies among other entrenched powerful interests groups in the country. It follows shortly after the government dealt a blow to the teachers' union with the education reform and the arrest, in a surprising and highly symbolic move, of its influential former boss, Elba Esther Gordillo, on charges of embezzlement of union funds and money-laundering.

Under the reform, along with specialised courts for settling competition disputes, a new Instituto Federal de Telecomunicaciones (IFT, federal telecommunications institute) will replace the existing Comisión Federal de Telecomunicaciones (Cofetel, the telecoms regulator), whose ability to fight business lobbies has often been questioned. The new body will have full responsibility for ensuring competition in the sector and would be in charge of granting and revoking telecoms and media concessions, which is currently the responsibility of the Ministry of Communications and Transport. It would also be able to classify as "dominant" any company with more than 50 percent share of the market.

The reform will also eliminate limits on foreign ownership of fixed-line assets while providing for the possibility for foreign investors to take up to 49 percent ownership of TV or radio broadcasters, pending a review by a foreign investment commission. This could significantly boost foreign direct investment (FDI) in a sector which has proven extremely dynamic in most emerging markets.

With respect to broadcasting, the final version of the reform did not incorporate some of the more controversial amendments that had been suggested in the days before the vote in the lower house, and which led to a rift between the PRI, and the PRD and PAN. According to the opposition, the PRI had attempted to limit "must carry" and "must offer" provisions in order to benefit Televisa, by forcing paid-TV firms to carry network programming for free, as well as to force networks to offer their programming freely as well. In the end, "must offer" was included in the reform intact, while "must carry" did suffer some modification, mainly that paid-TV firms are obliged to carry network programming only when it has over 50 percent of national coverage. This will not apply to programming from the eventual public network, as all paid-TV firms will be obliged to carry it. Additionally, the reform will create two new free-to-air television channels (together with a new government channel to offer a mix of cultural, educational and general interest programming), which will hopefully foster competition as the auction for the rights to run them would not be open to the two incumbents. However, the above could also open the door of the broadcast market to América Móvil, which so far has been kept out, resulting in the reinforcement of the market's most dominant player.

Although the reform is likely to be duly approved by the upper house, its implementation may still be challenged by the strong pressure exerted by business lobbies (although both América Móvil and Televisa have praised the reform) and the PRI's own support base, and fail to unleash full competition in the telecoms sector. The telecoms reform would, if fully implemented, no doubt be a major step towards reinforcing Mexico's competitiveness fundamentals, but the task is by no means a fait accompli. The fiscal and energy reforms come next, presenting their own unique challenges, while drug-related violence continues to cloud the country's business environment and attractiveness for investors and is unlikely to abate significantly in the near term. Plenty of other boxes remain too thick in Peña Nieto's long housekeeping list.

Irene Mia is Regional Director, Latin America and the Caribbean at the Economist Intelligence Unit.