The excessive concentration and lack of economic competition in many sectors of the Mexican economy, especially in the realms of telecommunications and broadcasting, are well known. For decades politicians have been talking about the need for reform. Weak and inefficient regulatory and public policy frameworks have kept the government from effectively addressing the quasi-monopolistic market conditions in these sectors. With the proposed legislation negotiated by consensus between President Peña Nieto and the main opposition parties, it seems this time the talk will actually materialize.
The Telecommunications and Economic Competition Reform is moving swiftly through the legislative process. It was approved by the lower house on March 22 and will now go to the Senate. If ratified without changes, this constitutional reform will then require passage by a majority of state legislatures, something achievable if we consider the speedy state ratification of the recent education reform. As the bill currently stands, it will open new investment opportunities, create two new national TV networks, and establish new regulatory agencies with authority to overcome many of the structural and practical obstacles faced by both national and international companies today. This legislation is one in a series of expected changes in sectors long attractive, but daunting, to many investors and businesses.
Specifically for investment in Mexico’s telecommunications and broadcasting sectors, the key opportunities lie in two elements:
1. The establishment of at least two all-digital, national, free-to-air TV networks to be granted through public bids, and the incorporation into law of the concepts of must-offer and must-carry for all broadcast, cable, and satellite players.
2. A significant increase in the percentage of foreign direct investment allowed – 100% for telecommunications and satellite communications, and up to 49% for radio and TV broadcasting. The latter would be further constrained by reciprocity criteria, i.e., the percentage for foreign direct investment allowed in the investor’s home country. Additional participation could be achieved using “neutral investments” and, through the legal figure of “Investment Promotion Company” (SAPI), ample flexibility exists for establishing statutory rules and outside agreements to address voting rights and profit sharing. The combination of the proposed increases in foreign direct investment and the use of SAPIs for neutral investments presents a very attractive option for the TV networks.
Confidence in the realization of the promised reforms centers on creating two new regulatory authorities, with autonomy and enforcement powers, for matters of telecommunications and economic competition. The new Federal Telecommunications Institute (IFETEL) would replace the current Federal Telecommunications Commission (COFETEL), and a Federal Economic Competition Commission (CFCE) would replace the Federal Competition Commission (CFC). Improvements would come both from the depoliticized way in which the commissioners for each institution are selected and confirmed as well as from added attributions and administrative tools to impose regulations without being suspended pending resolution of repeated judicial injunctions.
The main attributions include:
IFETEL: Will be the sole regulator for spectrum, networks, broadcasting, and telecommunications, and will also be in charge of authorizing, granting, and revoking all concessions. New economic competition regulatory powers will allow it to apply asymmetric regulations (different standards to players declared dominant), sanctions, limit concentrations, and even order the breakup of monopolies.
CFCE: Will serve as the regulatory authority for competition matters other than in telecommunications and broadcasting. It will be able to order the removal of barriers to competition, including the breakup of monopolies.
These changes are particularly significant for telecommunications because they will separate regulatory enforcement issues from general public policy issues. Currently the overlap (or “double window” as it is known in Mexico) between COFETEL and the Ministry of Communications and Transportation generates long delays and uncertainty in all regulatory matters. Moreover, when dealing with matters of economic competition, COFETEL has had to defer to CFC, which has reduced further the telecommunication regulator’s clout. If ultimately approved, IFETEL will become the sole authority. As always, however, success will be seen only through implementation – who is appointed and what resources and political support they receive, among other factors.
The legislation also creates specialized courts for matters of economic competition and telecommunications. These tribunals will possess the technical knowledge required to address these issues, granting legal certainty to those involved and serving to speed up any resolution.
This institutional overhaul brings unparalleled opportunity, not only for those interested in investing in the telecommunications and broadcasting sectors, but also for those who would benefit from regulatory changes in matters of economic competition in all sectors of the economy. The latter emerges from the creation of the two new regulatory agencies empowered to write new regulations that would define terms, procedures for addressing a claim, and sanctions for noncompliance, among other things.
As your eyes, ears, and advisor on the ground in Mexico, ManattJones is well positioned to help create the most favorable conditions for investors and foreign investment. ManattJones’ long history in Mexico and the U.S. offers a unique understanding of developments and grants unparalleled access to key regulatory and policy agencies. That knowledge and business presence will be invaluable as the reform moves forward and companies decide to take advantage of opportunities, such as seeking the authorization from the National Foreign Investment Commission to be able to successfully participate in any bid. In other instances a foreign investor may be better served by partnering with an appropriate Mexican company, one that will share your values and business strategic sense. ManattJones provides due diligence on partnering, as well as advice on how best to position your joint proposal.