Will the Energy Reform work?

Mexico is encountering extraordinarily complex and simultaneous dilemmas at present. On the one hand, an economy that for decades has been yielding a performance that in the best case scenario is mediocre and on the other hand, a stale government system, inadequate for the current realities and circumstances and, in any case, ineffective. The most evident manifestations of these challenges are observed in the lack of personal security under which the population lives, beginning with extortion and abduction, very low average productivity and generalized malaise. However much a multitude of reforms has been driven, there is no evidence whatsoever, after a year and a half of government, that President Peña’s government has a clue as to how to solve the problem.
The presidential discourse emphasizes that “we did not come to manage but to transform”. However, after various decades during which it has not been administrated, the country requires a functional government, appropriate for today’s reality. Of course fundamental transformations are required, but it is not evident that those that are driven are the adequate ones, that the government understands what their implementation demands or that there is the willingness to conduct these to a safe haven. More important yet, there is no awareness in the government that many of its actions are in effect the cause of an economic performance worse yet than the historical one.
It is this context within which the legislative discussion is approaching. With regard to the energy reform: many reforms, high insecurity, enormous expectations, inefficient government and an environment of political conflict that does not let up. In the energy theme the gamble is very large due not only to the fact that this could, potentially, free up the enormous resources that the country possesses, but rather because of its potential impact on the entire economy. The legal transformation that the Constitutional Reform of 2013 entails is monumental. What’s not obvious is whether the secondary reform will make it possible.
There are four enormous challenges that have to be solved well in order for the energy reform to be successful: the role of Pemex, the legal structure, the regulator and security. In terms of what Pemex, the industry’s factotum, is responsible for, the question is whether there will be anything left for other potential investors after the legislators –and all of the interests bringing up the rear- have been up to their old tricks. In a conceptual sense, the PRI proposed a modest reform, the PAN demanded a real opening and that was what in essence the constitutional reform produced. Today the struggle is to return to the modest proposal, the two great natural promoters of which are Pemex and the PRD. A reform that permits co-investments with Pemex wouldn’t be bad, but it is imperative to recognize that an unreformed Pemex, now without the paraphernalia of federal controls, would be the cave of Ali Baba and the Forty Thieves taken to its maximal expression. I suppose that not many of the target-investors would be moved to invest in that context.
The second challenge is that of the legal structure that characterizes the country. In order to invest, those potential investors require a legal framework that is clear and transparent. Most important for them are not great incentives but clear rules of the game, because they base their decision on that. Accustomed to investing in Cuba, Indonesia, Russia, Vietnam and other nations with poorly consolidated legal and political regimes, they seek clarity. Mexico’s legal tradition doesn’t offer much certainty in that regard: the law is rare that doesn’t confer enormous discretional powers on the authorities to change the rules of the game at any time. Strike two.
The third challenge is that which is relative to the regulator. In the same way that the potential investor requires certainty in the rules of the game, its main source of confidence lies in the regulator. A regulator perceived as independent and capable of enforcing the rules established in the law is the only way that investors will be willing to participate in the process. To date at least, it’s not obvious that the legislation will produce a reliable and independent regulator. There aren’t many of those in the country, thus this prerequisite paramount to invoking Sisyphus and his great stone.
Finally, the great problems of Mexico aren’t the drugs or the imports or the public expenditure. Mexico’s problem is the very poor quality of its government. The insecurity is the product of that circumstance and the decreasing popularity of the president is nothing more than a manifestation of this. Without functional but delimited government, the country will continue losing its bearings, albeit with a president infinitely more capable a politician and executor of legal changes.