Over the past 20 years, Mexico has made great strides reducing trade barriers and thereby allowing more private investment. While its current gross domestic product is growing annually at 4.8 percent, it still needs to enact more regulatory reforms to lift per capita GDP growth, raise living standards and reduce poverty at a quicker rate, says the Organization for Economic Co-operation and Development.

Unlike the nation's oil industry, the power sector there is partially open to foreign investment. It's a policy that began in the 1980s and one that was expanded under former President Vicente Fox. The same policy is continuing with its current leader, Felipe Calderon. But, the country will need 27,000 megawatts of new capacity over the next decade if it is to meet the projected electricity demand, officials from the Commission Federal de Electricidad (CFE) say. That will entail an investment of $50 billion.

Right now, Mexico has an installed capacity of nearly 52,000 megawatts. About 11,500 of that total, or 23 percent, are owned by alternative suppliers. In a Dow Jones story, Jaime de la Rosa, President of the Mexican Energy Association, says that a more liberalized state-owned CFE would attract private investors. He notes that Spain's Gas Natural SDG SA just acquired five gas-fired power plants with a capacity of 2,233 megawatts. But, de la Rosa would like to see private sector generation eventually rise from 23 percent today to 40 percent of CFE's total capacity.

While past economic reforms have borne fruit, Mexico still is far behind the world's developed nations in terms of living standards. Per capita income is a quarter that of the United States. To lessen that gap, it will have to do more to increase free trade and to improve its transportation and energy infrastructure. As it now stands, competition is still restricted. This is particularly true in the natural gas and electricity industries.

"Although its fiscal GDP is good, Mexico has to reduce the heavy reliance of the budget on oil revenue," says the organization of developed countries. "Furthermore, living standards remain well below those in other (developed) countries, and current GDP growth is still not high enough to ensure rapid convergence."

Right Balance

Altogether, Mexico has 12 free trade agreements with more than 40 countries -- a good foundation, but the nation still has many challenges: upgrading infrastructure, modernizing its tax system and labor laws, and allowing private investment in the energy sector. Toward that end, the organization says that the overall objective in the electricity sector is to strengthen the incentives to invest in generation and transmission to keep pace with expected future demand and to create a reliable supply of lower-cost energy.

To get there, the organization says that generation should be functionally separate from transmission. Under such a regulatory regime, an independent system operator would direct the flow of power over the transmission lines. The end product would mean that the state-owned enterprise could favor its own supply over that of competitors. Basically, alternative suppliers could move their electrons freely over the wires infrastructure, ultimately creating competition, better services and fairer prices.

The case for reform is clear. The state-owned CFE needs an annual cash infusion of $5 billion over the next decade, all to accommodate an expected growth in power demand of 5 percent annually. The government there can't help much, as it already has a foreign debt burden of $76 billion. "The possibility of opening generation to private investors while maintaining the transmission and distribution businesses in government hands sounds like the most probable one," says a report published by Standard & Poor's Rating Service.

The solution, though, is not as easy it may sound. All across Latin America, citizens are mistrustful of privatization. In the 1990s, promises were made only to go unfulfilled. The end result, in many cases, was higher energy costs, albeit many of the regulatory schemes were ill-conceived or moved to liberalize too rapidly.

Government-run enterprises, however, have fared even worse. They have shown themselves to be bureaucratic and laden with inefficiencies. While state-owned industries are concerned with keeping prices low, they have worked to inhibit private investment and have therefore prevented the modernization of their infrastructures. Simply, investors seek returns, which means that price of power would have to reflect the true cost of production. Absent that, they must continue to subsidize its electricity industry. In most cases -- as it is in Mexico -- they can no longer afford to do so.

The goal is to increase living standards without alienating the Mexican population. To that end, the country needs a cleaner and modern infrastructure to meet future energy demand. The right mix in the power sector may be to allow foreign ownership in some areas but maintain government control in others. It's a balancing act and one that would have to be gradually implemented. The progress that started in the 1980s, though, has to be taken to a new level now.



 

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