Constitutional reforms permitting private sector participation in Mexico’s oil production are proving controversial but necessary

In December 2013, Mexico’s Congress approved amendments to articles 25, 27and 28 of its constitution, ending the national oil company’s 53-year monopoly over the country’s hydrocarbons. The company, PEMEX, is now permitted to associate with the private sector in the extraction and refinement of oil, and private companies are able to participate in the production and commercialisation of electric energy. The controversial reforms were framed by ideological discussions, misunderstandings and public concerns about the future of the country. The PRD (the Mexican left) fought hard to block the changes, even blocking access to the Legislative chamber to prevent members of Congress from discussing the reform. Despite the controversy, a coalition composed of PRI and PAN MPs was able to change the articles, which were previously considered to be “untouchable”.

President Enrique Pena Nieto has maintained that the amendments will continue the national ownership of hydrocarbons, while allowing the company to seek alternative sources of national and international funding that it desperately needs to continue operating. Nevertheless, the public fears that it is a step backwards and a clear indication that the PRI (the hegemonic party that governed the country for more than 70 years) has returned to the presidency with the same privatisation style that characterised the years leading up to the transition to democracy, a strategy that resulted in a major economic crisis in 1994. So what do these reforms mean in real terms for the country? Why are they so controversial?

In March 1938, President Lazaro Cardenas gave a radio speech announcing Mexico’s oil reserves were to be nationalised, seizing it from the hands of international companies. The move was welcome in a country still suffering from the aftermath of a civil war and struggling to consolidate its governmental institutions. Numerous demonstrations supporting the initiative took place and people donated what they could to “pay the oil rescue”. However, Mexico didn’t have enough money to indemnify the international companies and the expropriation generated strong international pressure to boycott nationalisation. It wasn’t until 1947 that the debt was finally paid.

In 1960 article 27 was amended, explicitly prohibiting PEMEX from collaborating with any private company, national or international, on the extraction, production or distribution of hydrocarbons. It wasn’t until 1973 that Mexico’s oil production was sufficient to satisfy the internal market. By 1978, high oil prices gave the government substantial revenues, which were used to modernise the economy, establish social programmes and finance other activities. This generated the false impression that the country was “getting richer”. High oil revenues motivated the PRI government to impose a heavy tax rate on PEMEX, which sent about 67% of its revenues directly to the public budget. In 2012, it is believed that approximately 34% of the public expenditure came from oil revenues. This prevented the company from reinvesting in technology and infrastructure, leading to a decrease in production of approximately 45% between 1999 and 2010. PEMEX’s inability to use the revenues and reinvest them to increase productivity, together with growth in national consumption, has forced the country to import more oil than it actually extracts. Ironically, the more expensive oil gets in the international market, the worse it is for Mexico’s public finances.

The idea of allowing the company to co-participate with the private sector in the extraction and refinement of hydrocarbons will supposedly attract international investment, transfer technology and help reach deep-water oil fields. Both Chambers of Congress have approved the reform. For promulgation, it now needs to be approved by 17 of the 32 State Legislatures. It is expected to face strong opposition in states controlled by the PRD, which has condemned the amendments as “treason against the fatherland” and swornto defend the country against privatisation efforts. However, other important political actors such as the PEMEX Union have shown support for the changes.

I can’t say that the reform is complete or that it is enough to save either PEMEX or Mexico’s public finances. I am not even sure that the joint-venture model will work in Mexico, with its super-powerful and corrupt unions. That said, when it comes to PEMEX, a partial reform is better than no reform at all. For constitutions to survive and to be taken seriously, they must adapt to countries’ changing circumstances. In Mexico, PEMEX’s constitutionally enshrined monopoly may have helped to fund social programs and infrastructure in the 60’s. However, in 2014, it is holding back development of the country and preventing Mexico from taking full advantage of its natural resources.

Sofia Collignon is a PhD Student at the UCL School of Public Policy. Her research interests include decentralisation, party competition and comparative politics.

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