Politics, Business & Culture in the Americas

Energy in Mexico: The Politics of Reform

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While Washington has struggled with political gridlock, its southern neighbor has achieved notable legislative success over the past 12 months—thanks to a negotiating mechanism called the Pacto por México. Established soon after President Enrique Peña Nieto took office in December 2012, the mechanism was responsible for a series of major reforms in Mexico that had been pending for a number of years. But there are now serious questions about whether the Pacto will come apart as a result of renewed partisan skirmishing.

The Pacto brought together the three major political parties—the Partido Institucional Revolucionario (Institutional Revolutionary Party—PRI), the Partido Acción Nacional (National Action Party—PAN), and the Partido de la Revolución Democrática (Party of the Democratic Revolution—PRD)—in an effort to identify common legislative goals and provide a forum through which to work toward them. Compromises from each party were crucial to getting final approval from Congress for an ambitious legislative agenda that would be the envy of most countries.

The reforms, some of which require amending the constitution, span a broad number of sectors, including labor, education, telecommunications, and fiscal law. A financial reform requiring banks to lend more money to clients was passed by the Chamber of Deputies and awaits approval in the Senate; and both political and energy reforms were moved in the last weeks of 2013.

There have been numerous protests and demonstrations, and the opposition has continued to throw up roadblocks. For example, the PRD reacted violently to some aspects of the proposed energy reforms, which have been seen as the jewel in the crown of the reform agenda. The law—approved by the Chamber of Deputies December 12, 2013—will open the oil and gas sector to private and foreign investment for the first time since the 1950s through profit- and production-sharing contracts and through new licenses for exploration and production. The government’s hope is that opening up the sector will attract billions of dollars annually in new investment and achieve a much-needed boost to the nation’s oil production and reserves. While the center-right PAN supported the bill in both houses of Congress, the PRD labeled it an attempt to sell off national resources to American and foreign interests. As a result, it broke with the Pacto, threatening to disrupt the government’s future legislative agenda.

A major factor in the success of the Pacto in its early stages was a weakened opposition. Within the PAN, the election defeat of 2012 left deep scars between the party leadership (headed by Gustavo Madero) and the faction controlled by Senator Ernesto Cordero, who was widely viewed as President Felipe Calderón’s choice for presidential candidate, but who lost to Josefina Vázquez Mota in the party’s primaries in 2012.

Both the PAN and PRD leadership chose to work closely with the government and the PRI through the Pacto in an effort to prove that they were relevant to the process of governing and to influence the policy process. However, in recent months this has led to accusations from rank-and-file party members that the leadership has sold out the core ideals of the parties and has essentially been bought off by the government. A more dangerous challenge to the Pacto emerged in August, when the government surprised the national and international press by announcing a fiscal reform that focused on raising taxes on the middle class rather than applying the IVA (the value-added tax) to food and medicine, as had been widely predicted.

This has been interpreted as a conciliatory gesture to the PRD after the rupture caused by the energy reform proposal. The fiscal reform, however, proved highly unpopular. Proposed taxes on rent and mortgages and on tuition payments were eventually withdrawn by the government to secure passage of the legislation by the Congress, but it resulted in widespread public rejection and a drop in Peña Nieto’s approval rating from 55 percent to 50 percent, a very low level by Mexican standards. More important, it created a serious rift between the PRI and the PAN, with a number of PAN legislators pledging to vote against the energy reform proposal that was put forward by the government in August.

However, an intriguing new dynamic has emerged as a result of the rupture between the government and the PAN, which has demanded major policy concessions from the government to secure its continued support.

First, it has called on the government to be more ambitious in reforming the oil sector, and to commit itself to improving the contract terms to be offered to investors. Second, PAN has insisted that the government permit a vote on allowing limited-term re-election and a second-round voting system for the presidency.

The government conceded to this second demand, before allowing the energy reforms to pass through both the Senate and Chamber and before receiving ratification by the states. Although the process in the Congress was tumultuous, provoking one PRD legislator to give a press conference in his underwear in protest and the defection of the PRD from the Pacto, the government has achieved impressive advances that will improve Mexico’s productivity and competitiveness. It is still possible that the leftist party will return to the fold in 2014, but even without the PRD, long-awaited reforms should spark continued optimism from financial markets and, more importantly, a return to high rates of economic growth.

Tags: Mexico, Partido de Acción Nacional (PAN), Partido de la Revolución Democrática (PRD), Partido Institucional Revolucionario (PRI)
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