On May 20, Mexican President Enrique Peña Nieto presented his National Development Plan (PND) for the period 2013 – 2018.  The plan outlines his administration’s principal objectives within the general themes of security, equity, education, economy and global responsibility.  Mexico’s PNDs are intended to present each new administration’s broad priorities as a guideline for the various federal and state government agencies, which in turn develop specific programs aimed at achieving the overall policy goals.  As such, the PND represents a “This is what we want to do” plan without a “And this is how we will do it” section attached.  More important nuts and bolts will be provided subsequently in the National Development Financing Program (Pronafide) and the Federation Spending Budget (PEF).  Nonetheless, the PND usually receives a fair amount of attention at the outset of each administration, particularly in sectors that are sensitive to government spending, such as infrastructure and research and development.

A highly summarized overview of President Peña’s PND, based on the transcript of his remarks at the presentation ceremony and the document itself, includes the following five principal goals and selected key strategy pillars:

1)      Peace

*  Improve coordination between federal, state and municipal law enforcement agencies

*  Respect human rights

*  Restructure and modernize law enforcement and justice system agencies

2)      Inclusiveness

*  Erradicate hunger

*  Improve equality in access to services such as healthcare

3)      Quality education

*  Update curriculum to help students become competitive in the modern world

*  Generate greater and more effective investment in science and technology

*  Support innovation in products and services with high added value

4)      Prosperity

*  Maintain macroeconomic stability to provide a solid basis for growth

*  Support infrastructure development

*  Improve access for SMEs to services such as telecommunications, energy and credit

*  Upgrade regulatory environments and improve conditions for competion

5)      Global responsibility

*  Defend international law

*  Promote free trade

*  Demonstrate solidarity with the world’s peoples

In addition to the five goals, the PND establishes three “transversal strategies” that will apply across efforts in support of the goals.  These three strategies are:

1)      Democratize productivity: Create opportunities for development in all regions, economic sectors, and population groups, as well as establish incentives for workers to migrate from the informal to the formal sectors.

2)      Accessible and modern government: Make government services both more effective and more accessible to all sectors of the population.

3)      Gender perspective: All puplic policies will seek to promote gender equity in an effort to eliminate sex-based discrimination.

Well, that certainly is a full menu of good intentions, the likes of which the road to hell has been paved here in Mexico every six years going back at least to the administration of Miguel de la Madrid (1982 – 1988).  Pundit María Amparo Casar, in a post on the topic to ADNPolítico.com, calls Peña’s PND document “expensive, demagogic and useless,” and we are inclined to agree.  If the current government achieves all these goals over the next six years then we will be happy to admit we were wrong.  Peace and prosperity for all, however, have long been touted among national goals, and it well may be that things have steadily gotten worse over the years for most of the sectors ostensibly targeted for special attention.  We’re willing to give President Peña credit for an enthusiastic and interesting start, and we support his drive for long-overdue structural reforms.  Maybe this will be the sexenio that finally makes a difference, but from the looks of Oaxaca and Michoacán right now, we’re not counting on it.

Step away from the perimeter

Since bursting out of the gates on December 1, 2012, the Mexican administration headed by President Enrique Peña Nieto of the Partido Revolucionario Institucional (PRI) has gone so totally loco with reform initiatives that they’re starting to bunch up in Congress like a Talladega pileup.  As we discussed in a recent post, it’s remarkable how the new government seems to be taking on everyone and everything at once, including long-time PRI allies and interests heretofore so entrenched that they’re considered national institutions, such as Telmex and Televisa.  Of course, once you start combing through the nuts and bolts of the reforms, often they are not as radical as they are portrayed superficially and provide safety nets of sorts for the affected parties.  Peña and his team have intimated that there are no more sacred cows.  Here in Mexico, however, there are sacred cows and then there are supernaturally venerated pulsating bovine deities like the state oil monopoly, and the mere suggestion that perhaps it’s time they visit the slaughterhouse unleashes truly riotous rending of garments.  Peña’s highly anticipated energy reform is still a ways off as the administration heads into its running start, but in the meantime, the PRI is whetting our appetite with the legislative equivalent of a warmup band: a proposal that would amend the Mexican Constitution to allow foreigners to buy beachfront property in their own names.

In the post-Revolutionary period, Mexican law has taken pains to circumscribe opportunities for non-Mexicans to own businesses or property in the country.  This is not just idle crankiness but rather because Mexico historically has been the target of foreign interventions by powers including the Spanish (if you count colonization), the French, and on multiple occasions, the United States.  Once order was being restored in the 1920s following the Mexican Revolution, the founding fathers of the PRI, ironically enough, began to set out a highly nationalistic program designed in part to prevent domination of the nation’s wealth and institutions by foreign interlopers.  But as a great philosopher once said, that was then and this is now.  Mexico is being heralded breathlessly in business media as the “Aztec Tiger,” we urgently need to direct the world’s attention away from the morass of drug trafficking violence, and Enrique Peña Nieto is working hard to establish himself as a “can-do” president following the last six years of unmitigated bummer under Felipe Calderón.

So back to your private beach in Mexico: Article 27 of the Mexican Constitution currently states that “Within a distance of 100 kilometers from national borders and 50 kilometers from national coastline, under no circumstances may foreigners acquire direct title over land or water.”  The proposed constitutional change would allow foreigners to acquire direct title to land within the designated “prohibited zones” as long it is used exclusively for residential use and not for any commercial pursuit, along with some additional conditions.  When the initiative was introduced and approved by the lower house of the Mexican Congress in late April (it is now under deliberation in the Senate), the hue and cry from the guardians of national sovereignty rained down like hellfire from the sky.  As Congressman Manuel Rafael Huerta Ladrón de Guevara of the Partido del Trabajo exclaimed with the measured restraint characteristic of AMLO-suporters, “We will become slaves in our own land.”

As patriots queue to leap off Chapultepec Castle wrapped in the national flag, however, there’s a wrinkle to this issue that makes it even more of a head-scratcher.  Foreigners have long been permitted to purchase property in the restricted zones for residential use via a mechanism created for this purpose called a fideicomiso. The fideicomiso is a bank trust through which the bank holds nominal title to the property but the beneficiary of the trust is the foreign buyer of the property.  The property is not considered an asset of the bank and may not be used by the bank for any purpose other than being held legally for the benefit of the trust beneficiary.  Despite sounding like a nail-biter to most foreigners, this mechanism is widely used in Mexico by foreigners to buy residential property in the prohibited zones. Outside the prohibited zones, Mexican law allows foreigners to purchase property directly with no need for a fideicomiso.

So here’s how we see it: Changing the law to allow foreigners to take direct title to beachfront residential property will not lift a prohibition on foreigners buying such property, as many already have done legally.  But changing the law will likely boost investment in residential beachfront property by making the process less scary and costly to foreigners, which is in fact the intent of the initiative.  But those opposed to the change see it in a different light, judging from comments posted to on-line reports on the topic:

• These parasites encrusted in the national budget continue to commit TREASON against the NATION.  We have to stop these TRAITORS.

• The moment foreigners are given the right to own property in a country, we are giving up our sovereignty…Mexico is for Mexicans, not for foreigners.

• Little by little the foreigners are taking over our land, and after the expropriation it’s going to be hard to get rid of them if we ourselves are allowing this…

• Just remember what happened in Texas, they let in foreigners and they took over the whole state, this will be the same story since history repeats itself, the first step to colonization…

• How about we abolish the legal penalties for kidnapping then? (Ed. Note: FTW?)

OK that was just for fun because it’s like holding up a mirror to Fox News.  A case can be made to restrict foreign ownership of land along national coasts and borders, but those in favor of such restrictions in Mexico should have made that case long ago.  Our problem in Mexico is not so much that we have bad laws, but that our judicial system is extremely weak and routinely abused and manipulated by corrupt politicians and corporations, both domestic and foreign.  In our opinion, the lack of rule of law and accountability is a far greater threat to the national interest than some duffer in socks and sandals from Regina buying an ocean-view condo in Nuevo Vallarta.  Let’s get over the slogans and take a hard look at what is really holding us back.

Qué onda

The young administration of President Enrique Peña Nieto –  sworn in December 1, 2012 – has surprised with its zealous effort to push forward major reforms right out of the blocks.  Many of us viewed the return of the PRI with trepidation, considering the party’s long track record of dirty tricks and monkey business through most of the 20th century, but despite our customary distaste for the PRI we support the spirit of Peña’s reforms.  First came a labor reform  proposed by previous President Felipe Calderón and enacted in December.  Then came the education reform, whisked through Congress and signed into law in February against a backdrop of the sensational jailing of nefarious teachers-union despot Elba Esther Gordillo, about which we gloated uncontrollably here.  The big kahuna we are all waiting for is the energy reform, but Peña is working through his battles one by one (so far, mostly with success) and before we get to savor the political theatrics of the energy debate, we will have to resolve the current battle: Telecommunications reform.

Telecommunications covers multiple industry sectors and the technological considerations are so complex, that it is hard to whip crowds into a frenzy with slogans like “Spectrum auctions or death!,”  the way demagogues like Andrés Manuel López Obrador have with cries of “The oil belongs to the people” and whatnot. This has taditionally worked to the benefit of the dominant players because frankly the industry and its corresponding regulatory framework is just too hard to understand for most people.  The result of the early development of the telephone and television industries in Mexico and the cozy relationships between government and corporate leaders is that the original monopolies in these industries still hold extremely dominant market shares, to the detriment of consumers.  But advances in technology over the past 20 years have blurred the once-simple lines between telephone and television, and the internet and satellite television have helped make telecommunications even more broad and complex.  As more developed countries updated regulatory frameworks to keep abreast of technology, Mexico has fallen behind.  Ironically, the political party that worked so hard to create the monopolies in Mexico is now leading the effort that will ostensibly create more competition in the marketplace.  The big players, of course, are hard at work figuring out how to play the eventual reform to their advantage.

The telecommunications reform as presented by President Peña was approved by the Chamber of Deputies and sent to the Senate with observations.  The bill is currently under review by various Senate committees.  Industry specialists are heatedly debating the implications of proposed stipulations regarding arcane but critical issues such as must-carry-must-offer requirements for free-to-air and pay-TV broadcasters and asymmetrical regulations regarding rates charged by Telmex, the dominant fixed-line telephony provider, and smaller service providers.  A hot topic that is easier to summarize, however, is this: América Móvil, the owner of Telmex and mobile telephony leader Telcel, is keen to enter the television market, and television heavyweight Televisa wants to expand its position in mobile telephony.  The reform appears to offer each the opportunity to pursue these aims, in exchange for concessions to reduce their preponderant positions in telephony and television, respectively.  Telmex currently markets pay-TV to its telephone and internet subscribers through an alliance with satellite TV provider Dish, however América Móvil executives have made clear their interest in ditching Dish if regulatory changes permitted them to operate their own pay-TV company.  Televisa, in turn, has a stake in minor mobile telephony operator Iusacell in partnership with its otherwise rival in free-to-air television, Grupo Salinas, owner of the Televisión Azteca network.  Televisa appears similarly attracted to the idea of shedding its strage-bedfellows relationship with Azteca in favor of launching its own mobile telephony business.  Adding more flavor to the television soup, the telecom reform proposes to auction space for two new free-to-air television networks in the country that would be off limits to the two existing networks, Televisa and Azteca.

Interestingly, top brass at the dominant companies in the various sectors have so far been mostly muted in their opposition to the reform, and Mexico’s (and Latin America’s) biggest telecom magnate, América Móvil’s Carlos Slim, has even pretended to be pleased by the prospect of reform.  One aspect that has drawn perhaps the most ire is the proposed creation of a new regulatory agency, the Federal Telecommunications Institute (Ifetel), to replace the existing Federal Communications Commission (Cofetel).  In theory, the Ifetel would have vastly expanded powers to issue and enforce rulings to promote competition, compared with the wan milquetoast Cofetel, routinely brushed aside by the powerful corporations.

Numerous points of dispute have already been raised in Congress regarding the text of the bill, and much deliberation in the Senate and again in the Chamber of Deputies remains before the reform gets a chance at finnal passage.  Most observers project that the bill will pass in some form, however, so if Mr. Peña once again gets his way, we could be on the cusp of a welcome new era of competition in the Mexican telecommunications market.

And once we have this complicated telecom thingy out of the way – drool –  bring on the energy reform!  The speechifying is sure to be so very mad.

Police helicopters are clattering overhead outside our window in Mexico City this morning as the town buzzes with a frenzy of marvel, speculation and no small dose of schadenfreude over the stunning news that union leader Elba Esther Gordillo was arrested on charges of embezzlement to the tune of over US$150 million.  The helicopters may just be chasing some bank robber, but it adds to the sensational atmosphere surrounding one of the most eye-popping political hits in decades here.

Gordillo, the longtime head of the 1.5-million member National Education Workers Union (SNTE) is charged with systematically diverting funds from union coffers into personal accounts overseas: that part is no surprise to anyone.  Since her rise to the top of the SNTE through an internal coup in 1989, Gordillo’s ruthless wielding of power, ostentatious flaunting of personal wealth and untouchability despite endless allegations of corruption, influence peddling and even murder have made her a symbol of all that is putrid in the Mexican political system.  In a nation renowned worldwide for corrupt politicians, her sheer venality towers above most others.  And to make horror perfect, the fact that Gordillo ran the nation’s massive public education system untrammeled like a medieval lord – sending millions to Swiss bank accounts while children went without schooling in much of the country – made her and the SNTE perhaps the single greatest impediment to the country’s development (see one of our past posts on this topic here).

The part that comes as a surprise is that new President Enrique Peña Nieto is truly going all-in and throwing Gordillo in the slammer in a preemptive move against the SNTE’s imminent campaign of disruption in opposition to education reform.  The education reform, the first of its kind in decades, was signed into law this past Monday and is seen as an attempt to weaken the vice-grip of the SNTE over the entire education system.  The reform calls for wild-eyed innovations such as teacher evaluations and merit-based hiring that are unacceptable to the union, which operates an entrenched system of hereditary positions and the buying and selling of teaching salaries, which in many cases do not require the ‘teacher’ to go anywhere near a classroom.

The move could be a risky one for Peña, particularly considering the Mexican judiciary’s newfound enthusiasm for releasing detainees based on procedural irregularities.  But Mr. Peña, although youthful, is no innocent schoolboy when it comes to the dark side of Mexican politics.  Going after the likes of Gordillo is like grabbing a crocodile by the tail, and whoever does so better be sure they are not fannying about once the thrashing starts.   We cannot help but imagine that the secret planning sessions between Peña and top henchmen Miguel Angel Osorio Chong, Jesús Murillo Karam and Emilio Chuayffet  to set up the sting were held with the gravity of those called by Hua Guofeng to bring down the Gang of Four in 1976.  The government knows well that if Gordillo is released, her wrath will make the Sixth Seal look like a morning with Barney the Dinosaur, so we can only presume they will use their extroadinary powers to prevail upon the judiciary to see things their way.  Failing that, we’ll have quite the pig’s breakfast on our hands.

The move we are anxious to see now is the response by the SNTE.  At this moment the remaining union leadership is surely locked in frantic debate over what to do next.  The union and its followers were poised to launch a nationwide campaign of protests and disruption in opposition to the education reform.  They now face a high stakes choice: Throw all their resources into a furious defense of Gordillo, including a nationwide strike that would close public schools indefinitely (something that surely would warm the heart of former presidential candidate Andrés Manuel López Obrador), or make the strategic determination that Gordillo’s day is done and effectively abandon her to save what they can of their own instutional influence (while of course sending up smokescreens of hyperbolic protestation).  Unless Gordillo is released soon, we’re betting on the latter.

So let’s bust out the popcorn and see what happens next.  And may the schoolchildren of Mexico win, for once.

Happy holidays

Right now on Friday, December 21, 2012 it seems like we must be the last people in Mexico City still at our desks, as the sounds of holiday merry-making rise up from the cantinas outside our window in Colonia Condesa.  But before we pull down the shades and make a beeline for the punch bowls, we’d just like to make a few comments about the year coming to a close and the new year fast approaching.

We’re not going to dwell on the bad things that happened in Mexico this year, because the mainstream International media, principally in the United States, already covers that beat with ravenous enthusiasm.  We will mention a few things though, because this stuff really makes our ass want to dip snuff: Ongoing slaughter and disappearances related to drug trafficking; wholesale corruption making a mockery of society, such as Humberto Moreira’s loan racket in Coahuila and the Wal-Mart bribery scandal; and old fashioned electoral manipulation by the PRI in the run-up to the presidential election, to name a few.

We would like to mention a couple of things though that piqued our interest this year in a more positive way.  First, somewhere around mid-summer, it suddenly appeared that the international business media had abandoned its “All-Brazil-All-The-Time” policy and inexplicably latched onto Mexico as the new hot topic.  After the past few years of begging Brazil for its autograph and an 8×10 glossy with lipstick in the shape of a kiss on it, the media in the ficklest of fashions turned on a dime and began churning out stories on Mexico’s burgeoning competitiveness with China for manufacturing, booming automotive and aerospace industries, selfless commitment to free trade and even its prudent and responsible macroeconomic policies.  Prudent and responsible!  We have been called many things over the years, but these are not traditionally among them.  And as the year ends, our time in the limelight does not appear to be over yet.  So we will take our 15 minutes of fame and the accompanying manufacturing and portfolio investment, and hopefully this time we will spend it wisely and not blow it on hookers and rails like we did with the oil money during the Lopez Portillo administration.

The second item of note is not necessarily so great but we will try to make lemonade out of it and see what happens: Enrique Peña Nieto took office as Mexico’s new president on December 1.  Many concerns have been raised about Peña bringing back the authoritarian and corrupt practices that characterized the PRI during their 70-year run in power, and the violence and vandalism that occurred on inauguration day reinforce these suspicions.  But Peña came in charging with a slew of reform initiatives that are speeding through a suddenly cooperative Congress, and in fact we support the spirit of most of the new government’s reform proposals.  Most prominent of these at this moment is the education reform, which is the first in memory that appears aimed at breaking the stranglehold of the nefarious teachers union, SNTE, and its Darth Vader-like leader Elba Esther Gordillo over the national public education system.  The SNTE sits atop a long list of national disgraces in Mexico and the sooner the education system is wrested from its gnarled talons the quicker we can begin actually educating children rather than plundering the public coffers for the personal gain of corrupt union leaders.  The proposed education reform is rapidly being watered down in Congress and is opposed vehemently by Gordillo and the SNTE, so this may not be the arrow that slays the dragon, but the very idea that the new government is daring to take a whack at the entrenched system is more than welcome in our book.

Another item on the new government’s agenda that we favor is the proposed fast passenger train between Mexico City and Queretaro.  This idea has been bandied about for a while and certainly runs the risk of falling by the wayside, but we strongly favor the return of an inter-city passenger rail system and feel that this route is a perfect place to start.  Queretaro is a booming industrial city offering strong tourist attractions as well, and the movement of people and goods between the two cities is enormous.  Currently most of the passenger transport is by private auto or inter-city bus, and the traffic getting into and out of the capital can be soul-crushing.  The idea of a functional commuter rail line – like the kind other countries have! – between these two cities would be a dream come true.  And then, dare we dream of similar service between Mexico City and Guadalajara?  This would be fantastic.  We just hope the Peña administration’s current push for the new rail line doesn’t end up like former President Vicente Fox’s proposal for a new airport in Texcoco, which ended up with no airport but much shameful state-sanctioned violence and repression, presided over by *ahem* Enrique Peña Nieto.  Oh well.

So what’s ahead for 2013?  The pieces seem to be in place in Mexico for guardedly optimistic expectations for the economy.  Much, of course, will depend on the performance of the United States, by far Mexico’s largest trading partner.  If U.S. political leaders can pull a rabbit out of their hat and prevent the “fiscal cliff” from sending the country spiraling back into recession, Mexico stands to gain from even moderate performance north of the border.  The manufacturing base is expanding, inflation is under control, export markets are gradually diversifying, and proposed energy, fiscal and regulatory reforms offer at least the prospect of some juice for the GDP.  This morning we spied a report on some bank projecting Mexico’s 2013 GDP growth at 4.1%.  These guys may have hit the punch bowl a little early that day, but hey, it doesn’t hurt to dream.  This holiday season and for the coming year, then, may all our collective dreams come true.

Have a happy and safe holiday.

Post by Agathe Vigne for Mexico Business Blog

Petroleos Mexicanos (Pemex) and Mexico’s energy sector in general are bound to evolve in the next six years. That was one of Mexico’s newly elected president Enrique Pena Nieto’s  seven campaign promises.  To embody that  change, EPN is counting on two new leaders at the head of the ministry of Energy (Sener) and Pemex.

The new energy minister, Pedro Joaquin Coldwell, is a 62-year-old seasoned politician. A long-time member of the PRI, Coldwell has occupied a variety of positions inside the party and has served as local and federal deputy and senator for the state of Quintana Roo.

On the other hand, 37-year-old Emilio Lozoya Austin has been at the head of private companies and investment funds, as well as Director for Latin America at the World Economic Forum.  Except for his past stint as analyst at Mexico’s Central Bank, Banco de Mexico, Emilio Lozoya has no real experience in government. However, he is the son of a former energy minister under Carlos Salinas de Gortari, Emilio Lozoya Thalmann.

Though their profiles strongly differ – Coldwell, the experienced politician specialized in tourism and development, and Lozoya, the young financial shark – they  have one thing in common: they are new to the energy sector.  That could be seen as a weakness, as critics already warn of the privatization of Pemex and the uncontrolled selling of national resources to transnational companies.

Nevertheless, their relative independance from the controversial Oil Worker’s Union (STPRM) could also be a strength.  Indeed, the country needs to review its reliance on hydrocarbon resources and ensure the future financial health of Pemex through courageous exploration programmes and a profound internal restructuring.  This will mean making decisions that may be opposed by powerful union officials, some of which are influential members of the PRI.

Changes already announced for Pemex in its 2013-2017 business plan include the gradual opening of  Pemex refining and the modernization of petrochemical plants (particularly regarding ensuring the electricity supply) and transportation operations.

On exploration and production, not much has been said since the discovery of two deepwater fields this year. Though analysts are betting on more associations with the private sector – through joint industry projects, for example –  no constitutional change has been clearly announced yet. However, a modification of article 27 of the Mexican Constitution is necessary for Pemex Exploration and Production (PEP) to create associations with private firms.

Medium-term challenges are not only financial but also technological for PEP and a complete reshaping of the subsidiary is necessary for its long-term survival.  In a previous post, we touched on the financial and technological challenges associated with deepwater exploration and production.

From “Perspectives for the development of shale oil and gas” (“Perspectivas para el desarrollo de gas y aceite de lutitas”), a document published by the Ministry of Energy (SENER), it can be concluded that PEP is also struggling with its 2010-2012 shale gas exploration and exploitation plan.

Actually, according to the author, Mario Gabriel Budebo, the only possibility for Pemex to make substantial gains with shale gas exploitation is to find oil as well in the field, and in sufficient quantities to make it profitable. Furthermore, it would be interesting to add environmental costs to the already high E&P costs, to assess whether shale gas is sustainable as well as commercially viable.

Since the 2010-2012 plan was launched, six wells have been drilled in the north of the country but very little gas was obtained, according to UNAM oil analyst Fabio Barbosa.

In its 2013-2017 business plan (published in November 2012), Pemex announced plans to drill 175 shale gas wells. Nevertheless, only a few weeks after the plan’s publication, Pemex restructured its activities and shifted focus from the north of the country to the Tampico basin region (north of Veracruz), abandoning large territories with shale gas potential.

It is difficult to read Pemex’s (and Mexico’s) policy on this precise point.  While the United States is starting its transition to natural gas and has been exploiting shale gas more intensively in anticipation of the oil peak, Mexico has been unable to develop technological and financial models adapted to the E&P of non-conventional resources.

According to Patricia Espinosa of the Foreign Affairs Ministry (SRE), Mexico holds the world’s fourth largest recoverable shale gas resources.  Will the new directions of SENER and Pemex drive the transition toward shale gas or will they bet on other alternatives?

Email Agathe Vigne at a.vigne@bdp-americas.com

Sources: Reforma, 15-11-2012 y 13-11-2012
Business News Americas 28-11-2012 y 3-12-2012
CNNMéxico 30-11-2012
“Perspectivas para el desarrollo del gas y aceite de lutitas”, Mario Gabriel Budebo, Secretaria de Energia, 1/10/2012

Florence Cassez

Our colleague Agathe Vigne weighs in on Mexico-France relations

Ever since the foundation of the young nation, France and Mexico have had a turbulent relationship. The history of the French intervention (1861-1867), starting with the imposition by Napoleon III and the later execution of Emperor Maximilien is still present in the memories of Mexican people, who celebrate their country’s victory over France in the battle of Puebla every year on May 5.

More recently, the case of Florence Cassez has been poisoning the relations between France and Mexico. The 38 year old French citizen was arrested in 2005, during a highly publicized police intervention. She was then sentenced to 60 years in jail on charges of kidnapping, participation in organized crime – with the organization Los Zodiacos, led by her boyfriend Israel Vallarta -  and illegal possession of firearms.  Four witnesses pointed to Florence Cassez as a member of the organization who participated actively in the kidnappings.

Though the case appeared simple at first, irregularities in the process of Cassez’s arrest came to undermine the decision of the Mexican courts.  Florence Cassez was detained on the road a day before Mexican police and journalists staged a fake arrest for broadcast on Mexican television.  Her consular rights were not respected, and she claims to have been abused and tortured by the police during her interrogatory.

French authorities intervened at the beginning of the judicial process, requesting at first that Cassez be freed and later that she be extradited back to France. Then French President Nicolas Sarkozy and his Mexican counterpart Felipe Calderon clashed over the case, as both presidents intended to “use” Cassez to boost their declining popularity.   While Calderon struggled to show he was tough on crime and would not let foreign influences undermine Mexican court decisions, Sarkozy was eager to improve his image in his homeland a year before elections.

Diplomatic tensions soon arose and events such as “The year of Mexico in France” were canceled. The symbolic consequences were more important than the economic ones as business as usual followed between the two countries. The SAFRAN corporate group invested heavily in the region of Querétaro, and exchange programmes were maintained as were other trade fairs and commercial events.

Nonetheless, diplomats on both sides had to wait for the election of François Hollande and Enrique Peña Nieto’s recent visit to Paris for things to really cool down.

Though a supporter of Florence Cassez, Hollande has been more subtle in his approach and has shown more respect than his predecessor towards Mexican institutions.  On the other hand, Peña Nieto’s visit on October 17 opened a possibility for the extradition of Cassez and the revitalization of trade and cultural relations between the two countries. The Mexican president-elect insisted on the importance of educational and cultural links between the two countries and announced the creation of a new police force inspired by the French  gendarmerie (national police with military characteristics).

Peña Nieto not only met with François Hollande and invited him to Mexico in 2014, he also met with the directors of some of France’s most important companies: Air Liquide, Alstom, Axa, Lafarge, L’Oréal, Publicis, Sanofi-Aventis, Vinci, Vivendi, Danone, EADS, GDF-Suez, RATP, Safran, Schneider-Electric, Total and Veolia-Environnement.

Some of them, like Safran, EADS and Schneider Electric, have made significant investments in Mexico in the past decade.  Others, like Alstom or Veolia, have associated with Mexican companies like ICA to develop projects such as Mexico city’s new metro line.  In total, more than 300 French companies are present in Mexico.

France exports more to Mexico than Mexico does to France, but trade in general is modest in volume for both countries.  France’s trade surplus in 2011 amounted to 1 billion euros.   Some 90% of French exports to Mexico are industrial products for industries such as agro-industry, aerospace and construction. France is Mexico’s 13th largest export market and mainly imports medical instruments, computer parts, and office and aeronautical equipment.

The French community in Mexico City is the third in importance after the American and the Spanish. However, Spaniards and Americans seem to invest a lot more in Mexico than the French do. This paradox can be explained by a deficit of image on both sides. While the French still consider Mexico as a dangerous, bureaucratic country where investment is risky, Mexicans see France as a cultural leader more than as a potential trade partner and client.

Nonetheless, both countries appear committed to strenghthening their cooperation in the next decade.  While French SMEs are looking for new, dynamic markets to invest in, significant trade agreements signed by Mexico with the European Union should stimulate its exports to the old continent.

Will the French eat their coq-au-vin with chiles jalapeños and Mexicans top their enchiladas with roquefort?  Certainly not, but both countries have a lot to gain in leaving egos aside and working together in developing key innovations in the environmental, agricultural, defense or telecommunications sectors.

a.vigne@bdp-americas.com

This week our colleague Agathe Vigne returns with some observations on the proposed labor reform currently working its way through the Mexican Congress.

Oh it's on

October 2 is the occasion for Mexico to remember the Tlatelolco massacre that took place during the 1968 student demonstrations in the Plaza de las Tres Culturas in Mexico City.  Each year on this date, Mexican students, non-government organizations and most unions meet up and use the anniversary as an opportunity to voice their political viewpoints during a well-covered march around the city.

This year, most debates concerned the labour reform that will be discussed in the Mexican Senate over the coming weeks.

To summarize the reform’s main points:

-      The law condemns all kinds of discrimination and gives a specific definition of workplace harassment,

-      The law gives rights to domestic workers, and facilitates maternity and paternity leaves

-      The law strictly defines subcontracting. Outsourcing “can not be realized in the substantive activities that constitute the enterprise’s main object” and it “should be justified by its specialized character that adds an input to the processes of production or services” (article 15).

-      Hourly payment is made legal, with a minimum set at 7 Mexican pesos per hour

-      Different types of contracts have been created by the new law: 6-month contracts for employment trial, temporary contracts or contracts requiring initial training (articles 35 and 39)

The project’s main defenders have argued that the law would allow for informal-sector workers (almost half of the working population) to gain access to social safety net protections, making it easier for employers to formalize their situation. It should also allow Mexico to gain competitiveness, after the World Economic Forum ranked it 53rd out of 144 countries in its yearly report.

However, the reform has created an uproar among unions and civil society organizations. The “Frente Legislativo” (Legislative Front), an alliance of the country’s leftist political forces, seized the Congressional presidium to protest the reform and issued a list of 261 points of contention regarding the proposed text. Critics concentrated on the uncertainty of the new contract schemes and the institutionalization of Mexico becoming a “subcontracting” country with a cheap labour force.

Despite claims that the reform is needed to improve competitiveness and boost growth, some observers are questioning whether the reform will really change anything for the Mexican economy and the relationships between workers and employers. The Economic Commission for Latin America and the Caribbean (ECLAC) argues that the reform will not create new employment. Though it might help formalize some jobs, the positive impact is difficult to calculate.

On the other hand, as currently written the reform does not weaken union power or increase the transparency of union finances. Furthermore, in terms of competitiveness, and according to the World Economic Forum’s report, Mexico’s priority should be to reinforce its institutions and fight against corruption and insecurity.

a.vigne@bdp-americas.com

Information collected from media reports over the past month:

• Manufacturing: Spanish appliance manufacturer Fagor will invest US$3.5 million to expand capacity at its production plant in the central state of San Luís Potosí.  The project is aimed at boosting output of products such as refrigerators, dishwashers, ovens and other kitchen equipment. (Mexican Business Web, August 27, 2012)
• Logistics: Mexican rail operator Ferrocarril Mexicano (Ferromex) plans investment of approximately US$2.3 billion over the next five years to upgrade infrastructure to meet projected growth in demand for rail service.  Resources will be used to expand and improve track and freight terminals to handle expected demand growth from the automotive and mining sectors. (El Economista, August 26, 2012)
• Building materials: U.S. ceramic flooring manufacturer Daltile opened a new production facility in the central state of Guanajuato.  The US$65 million site becomes the company’s eighth manufacturing location in the country. (El Economista, September 4, 2012)
• Security: Brink’s Panamericano de México, Mexican affiliate of U.S. secure transport firm Brink’s, is projecting investment of US$30 million over the next three years for upgrades and expansion.  Plans include upgraded armored trucks and equipment, technology enhancements and training for personnel. (Mexican Business Web, September 7, 2012)
• Electronics: U.S. contract manufacturer Sigmatron inaugurated a new production facility in the northern state of Tijuana.  The US$2 million plant will produce electronic components for the medical, automotive and electronics industries. (Periódico Industrial Siglo XXI, September 11, 2012)
• Steel: Mexican steel pipe manufacturer Tubacero began construction on a new production plant in the northeastern state of Nuevo León.  Tubacero intends to produce high performance helical tubing at the US$90 million facility, the company reported. (Reforma, September 17, 2012)
• Solar energy:  Sonora80M, a consortium including Spanish investors, initiated construction of a large scale solar energy plant in the northern state of Sonora.  The US$75 million project will be built and maintained by Portuguese developer Martifer Solar and is planned to produce 20 MW of power initially and ramp up to a maximum of 80 MW. (Milenio, September 19, 2012)
• Automotive: German auto parts maker Marquardt inaugurated a new manufacturing plant in the central state of Guanajuato.  The US$50 million facility will produce ignition switches, electronic locks and other electrical parts for clients such as General Motors, Chrysler and BMW. (El Sol de León, September 26, 2012)
• Airports: Mexican low-cost air carrier Interjet will invest US$25 million to construct four new maintenance hangars at the Toluca International Airport, the company reported.  Interjet is currently upgrading its hangar at the Mexico City airport for an additional US$25 million. (Reforma, September 28, 2012)
• Automotive: Japanese multinational corporate group Hitachi announced construction of a new manufacturing plant in the central state of Queretaro.  The US$100 million facility is planned to produce suspension components for supply to automotive OEMs. (Hitachi, September 20, 2012)
• Aviation: U.S. aviation maintenance services provider Hawker Beechcraft, in a joint venture with Mexican executive air travel operator Aerolíneas Ejecutivas, opened a new repair and maintenance facility in the northeastern city of Monterrey.  The US$5 million service center will provide MRO services for airframes, power plants and avionics systems, as well as painting services for private jets. (El Financiero, September 28, 2012)

This week we are pleased to feature a guest post by our colleague Agathe Vigne, a trade consultant specialized in the oil and gas industry.

The times they are a changin'

Mexico’s national oil and gas company Petroleos Mexicanos (Pemex) has represented a dilemma for Mexican governments over the past decades. Every proposed reform is subject to a large debate throughout society on whether or not to privatize the “national treasure.”

While Vicente Fox sagely compared Pemex to the Virgin of Guadalupe, both “symbols for Mexicans that should be handled with care,” President Felipe Calderon tried a more direct approach with 2008’s energy reform. Debate over the bill came to its peak with the occupation of the national assembly and the subsequent withdrawal of the most controversial aspects of the text.

While on an official visit to Brazil this past September 19, President-elect Enrique Peña Nieto (EPN) has again mentioned the possibility of a reform that would allow for more private investment in the company. “What I am suggesting is Pemex’s modernization,” he said, “It is not about privatization, it is a mechanism that facitilitates private sector participation.”  His idea is to increase the national company’s competitiveness through a gradual partial opening to international stock markets. (El Universal, September 20, 2012)

This declaration follows the opinion expressed by Pemex’s general director  Juan Jose Suarez Coppel on the eve of the Mexican Oil Congress, that took place from September 10 to September 15.  Suarez Coppel brought up three options for Pemex’s future:

-          the “Banxico option,” that consists of removing Pemex from the national budget and giving it financial autonomy. This option wouldn’t change much of the company’s functionning, and the only way for the private sector to intervene in the company would be via incentive-based contracts. These have proved to be insufficient in the case of complex or risky projects such as shale gas or deepwater exploration.

-          the “Saudi Aramco option,” which consists of privatizing the company. This would require a constitutional modification, with a two-thirds majority in Congress and would create an uproar in the population.

-          the “Petrobras option,” which seems to be what EPN has in mind. This would consist of creating a mixed company that would be able to compete and associate with international oil majors.  Such a reform would also require a two-thirds majority in Congress but would be less controversial, given the Brazilian and Colombian success stories. (Business News Americas, September 10, 2012)

These recent announcements show that Pemex has no choice but to evolve quickly. Indeed, the company is confronted by a very high debt due to wrong choices in financing (pidiregas), very high tax rates, pension liabilities up to 800 billion pesos (US$62 billion), technology transfer issues, and general lack of capacities to exploit complex oil and gas fields.

The example of deepwater exploration is striking.  Juan Carlos Zepeda, president of the National Hydrocarbons Commission, underscored that Pemex does not have the equipment, material, personnel, security policies or technology to exploit deepwater fields.  Such projects generally require the association of three to five oil companies, in order to reduce risks and implement the best possible practices.

This year’s Mexican Oil Congress put Chevron in a place of honor with a long conference on its deepwater projects around the world.  Most international oil majors were present in the trade show, almost eclipsing Pemex’s traditional partners — oil services companies such as Schlumberger or Halliburton. The sign of a change towards a Brazilian model?

Agathe VIGNE

Trade Consultant for Oil and Gas