Business groups are once again in a lather about the reform agenda of Mexican President Andres Manuel Lopez Obrador, or AMLO as he’s often referred to. The latest bone of contention is his wide-ranging plans to overhaul Mexico’s energy sectors. The energy reforms will enhance the powers of energy ministry Sener and regulatory commission CRE to review and cancel midstream and downstream permits. They will also expand the role of national oil company Pemex and state-owned electricity utility CFE (Federal Electricity Commission).
The EU’s Ambassador to Mexico, Gautier Mignot, recently described the reforms as a major source of worry to the European companies that “have invested and taken risks in the country.” Mary Ng, trade minister in the cabinet of Justin Trudeau — he of the Trans Mountain pipeline expansion — declared that Canada was “increasingly concerned about the investment climate in Mexico” in light of the energy bill.
The ultimate goal of AMLO’s reforms is to roll back some of the sweeping energy reforms unleashed by AMLO’s predecessor Enrique Peña Nieto seven years ago. Those reforms opened up Mexico’s long-protected oil and gas sectors to global competition and expertise. They were supposed to lead to lower energy prices for domestic consumers as well as thrust Mexico into a more prominent position in the global hydrocarbons market. Instead, the opposite happened: prices of gas, diesel, natural gas and electricity soared. And rather than reversing Pemex’s decline, the reforms sharply accelerated it.
As Jacobin Magazine reports, many of Pemex and CFE’s global competitors did very nicely out of the new set up:
The CFE has calculated that, taking into account subsidies, inflation, exchange-rate fluctuations, irregular supply, and rate increases, the opening of the energy market to private suppliers has cost the nation some $412 billion pesos (US$20 billion). Of this, $56 billion pesos are to have gone to one project alone, the La Venta wind farm in the state of Oaxaca, operated by Spanish energy giant, Iberdrola.
La Venta is one of some thirty-odd wind projects in the Isthmus of Tehuantepec, all but a handful owned by foreign multinationals, which have become notorious for predatory contracts, unpaid taxes, a failure to properly consult with local populations, and miserly profit-sharing agreements of one percent minus costs, a quarter of what is paid abroad. And instead of benefiting the impoverished Huave, Mixe, Zapotec, and Chontal indigenous groups that live clustered around the parks, the subsidized energy goes to feed corporate clients such as FEMSA, Mitsubishi, Gamesa, and the Bimbo Group, which can then boast of their commitment to renewable energy in glossy brochures and at shareholder meetings.
The AMLO administration wants to rewrite some of the rules of the game while also strengthening Mexico’s energy independence. To reduce the country’s reliance on gasoline imports from the US it has poured billions into building new refineries and upgrading old ones. It has also tried to halt the plunder of Pemex by the highly sophisticated gangs of oil thieves — the so-called huachicoleros — that tap the pipelines that crisscross the country as well as the internal plunder being carried out by Pemex’s senior executives and union leaders.
The Electric Industry Act, signed into law by AMLO on March 9 but since blocked by a federal judge, aims to ensure that the national grid acquires its energy first from public (i.e. national) sources and then, as necessary, from private ones. The law will also set a fee structure for customers that can rise no faster than inflation. It also eliminates the obligation for the Federal Electricity Commission (CFE) to purchase from “auctions” of energy — in practice, a massive giveaway to private suppliers that locked in their profits at taxpayer expense.
“No way are we going to favor Iberdrola any more,” AMLO said last October.
AMLO’s attempts to reinvigorate Mexico’s fossil fuel industry has drawn stinging criticism from many quarters. “Nothing can shake AMLO’s fossil-fuel fixation,” squealed the Economist. But much of the criticism is driven by self-serving hypocrisy, as The Jacobin points out:
Never mind the stunning hypocrisy of the industrialized world, which has been responsible for the overwhelming majority of fossil-fuel emissions over the last two hundred years, now lecturing a country like Mexico on curbing its own output. Never mind the fact that Mexico barely produces 1 percent of the world’s fossil-fuel emissions annually, while China and the United States alone account for 43 percent. Never mind the fact that renewable energy makes up a very small fraction of the total energy participation of private companies in Mexico.
Never mind the fact that coal, to give one example, makes up twice the share of energy output of the United States and nearly three times that of Germany, without this triggering corresponding lectures from billionaire philanthropists. Never mind that the energy-reform law gives priority to cleaner sources of energy. For this predictable scrum of commentators and bad-faith political actors, what is essential is that Mexico open the door to its grid to any and all, together with subsidies, guaranteed profits, and the ability to cherry-pick prime corporate clients, leaving the Federal Energy Commission to hold the bag. If not, the club of weaponized environmentalism will be ready and waiting.
Lost in the morass of self-serving argumentation, moreover, is the potential for a more sober analysis of where Mexico is headed with renewable energy. This would include areas where the nation is making advances: as Energy Secretary Rocío Nahle points out, Mexico already has the installed capacity to produce 31 percent of its energy through public renewable sources, were they allowed to be put fully into use.
For the moment AMLO’s energy reforms have been held up by the courts. But in two months’ time AMLO could further strengthen his grip on political power in Mexico, assuming Morena, the political movement he leads, wins majorities in the Congress and the Senate. If recent polls are any indication, that is likely to happen.
And that terrifies business lobbies. Before foreign investment in Mexico’s energy sector dried up in 2018, contracts representing a projected investment of around $200 billion dollars had been signed, according to the Mexican daily El Excelsior. Now many of them are up in the air. In a press release last week Mexico’s largest business group (CCE) denounced AMLO’s energy reforms as an attack on private property that would only hurt Mexico’s economic development:
“Both initiatives [the reform of the energy power sector and the overhaul of the oil and gas industry] unexpectedly change investment rules, threaten legality, private property, international commitments and, especially, the environment and health of the Mexican people.”
Strained Relations Since the Beginning
Relations between the AMLO government and big money interests have been strained since the day he became president. One of his first acts was to scrap a new $13-billion airport for Mexico City that was almost one-third finished, at least $4 billion over budget, and mired in allegations of corruption. A staggering 70% of the contracts for the project, some of which had a duration of 50 years (with the option of extending them to 100 years), had been awarded without tender, in direct contravention of the Mexican government’s own anti-corruption laws.
But the biggest problems with the Texcoco airport project were structural and environmental. The site chosen for its development was a drained lake bed that attracted much of Mexico City’s run-off water. The ground still had extremely high water content and low resistance to stress. For the big construction companies involved, it would have been the perfect boondoggle: once the airport was built, the chronic structural problems that ensued would have necessitated huge amounts of maintenance work, just to keep the land fit for purpose. Now the Texcoco lake is being refilled and the land it occupied converted into one of the largest urban parks in the world.
Many of the airport project’s bondholders have already been reimbursed. The worst of the economic pain was borne by the construction companies involved in the project. They included Carlos Slim’s Grupo Carso, one of Mexico’s biggest construction conglomerates. But Slim has been partly compensated by being invited to participate in other big infrastructure projects, such as the construction of Tren Maya intercity railway on the Yucatan peninsular.
Cracking Down on Corporate Tax Avoidance and Obesity
AMLO’s government has also raised the hackles of business groups by demanding that large corporations begin paying the taxes they owe. For the first time in decades, serious pressure is being applied. In July last year the Government announced that it had launched criminal proceedings against 43 companies that owed 55 billion pesos ($2.6 billion) to the treasury in unpaid taxes dating back to 2010. Many of the companies ended up agreeing to settle their tax debts. Coca-Cola bottler Femsa, and brewer Grupo Modelo, a division of the world’s largest brewer Anheuser-Busch InBev, paid hundreds of millions of dollars in current taxes and back taxes.
As a result, the Government was able to raise more funds in 2020 than 2019, without raising taxes on the middle classes. But once again, business lobbies were not happy. The American Bar Association (ABA) lambasted the Mexican government for using heavy handed tactics, including criminal probes into tax fraud and the threat of legal sanctions, to motivate corporate tax dodgers to finally settle their tax bills. Four ambassadors, from the US, Canada, Japan and France, also paid Raquel Buenrostro, who heads Mexico’s SAT tax authority, a visit last year, in the hope of convincing her to back off a little, but to no avail.
The Mexican Government’s decision to pass one of the strictest food labeling laws on the planet last October has also irked business groups. As a result, bags of chips and other processed food packages and soft drinks cans and bottles must bear black octagonal labels warning of “EXCESS SUGAR”, “EXCESS CALORIES”, “EXCESS SODIUM” or “EXCESS TRANS FATS” — all in big bold letters that are impossible to miss. Many states have also introduced legislation making it much more difficult for retailers to sell junk food and sugary drinks to children.
Mexico consumes more processed food than any other country in Latin America. In the past 20 years the number of obese and overweight people has tripled, with 75% of the population now overweight. It also experienced the highest average weight gain during last year’s lockdowns of 31 countries surveyed by IPSOS. And that makes the population even more vulnerable to Covid-19.
The United States, EU, Canada and Switzerland, home to some of the world’s biggest food companies, have tried to derail the new legislation. But to no avail. The domestic business lobby group Coparmex said that banning the sale of junk food and sugary drinks to minors represents a frontal attack on commercial freedom and freedom of choice. It will also have economic consequences for businesses in the retail sector, it warned. But they pale in comparison with the economic and health impact of widespread obesity, especially with Covid raging. As such, the government, to its credit, has stuck to its guns.
Outsourcing Bill
The AMLO administration has also passed a bill to ban the outsourcing of personnel to third party firms, except for specialized work outside a company’s main economic activity. Companies operating in Mexico often set up separate firms to employ most of their workers as a means of avoiding legal and tax burdens, including a mandatory annual profit sharing payment to employees. Thanks to the new legislation, that is now more difficult to do.
AMLO also refused to bail out struggling big businesses during the early months of the pandemic. He steadfastly refused to create another “FOBAPROA,” in reference to the deposit insurance fund the Zedillo government used to directly bail out many of Mexico’s biggest banks, and indirectly many Mexican corporations and Wall Street banks, at the height of the Tequila Crisis. It was one of the world’s first (and worst) “bad banks.”
Public investment under AMLO’s administration remains extremely low. His government’s fiscal proposals for combating the slowdown are, pound-for-pound, among the most timid in Latin America. Most of the money spent has gone toward bolstering social welfare programs for the most vulnerable, including the elderly, single mothers and the unemployed. The government has also offered low-interest mini-loans of up to 25,000 pesos ($1,000) to micro-businesses and raised pensions for seniors.
It is one of the reasons why his government is still popular: it has actually helped to improve the lives of the millions of rural and urban poor who were essentially hung out to dry by previous administrations. Another reason is that he is widely perceived — by and large correctly — as a leader of honor and integrity. After the corrupt excesses of previous administrations, particularly the last one, this is a key part of his attraction.
Despite forging close ties with certain business interests, including the retail and banking magnate Ricardo Salinas Price and the global asset management firm BlackRock, AMLO does not give the impression of wanting to sell the country out on the cheap.
His presidency still had an approval rating of 58% in March, according to the polling firm Mitofsky. This is no mean feat given how hard the pandemic has hit Mexico and its economy, in part due to the government’s own mismanagement of the crisis. It also means that AMLO’s political movement, MORENA, is likely to further strengthen its grip on political power in the upcoming midterms. And that appears to be the last thing the business elite, both inside and outside Mexico, wants.
(Nick Corbishley writes about financial, economic and political trends and developments in Europe and Latin America. Article courtesy: Naked Capitalism, an American financial news and analysis blog.)
