MULTI-YEAR EXPERT MEETING ON SERVICES, DEVELOPMENT AND TRADE:

THE REGULATORY AND INSTITUTIONAL DIMENSION

Geneva, 6-8 April 2011

TRADE IN INFRASTRUCTURE SERVICES AND REGULATORY MEASURES

By

 

Guillermo MALPICA SOTO Director General of Services Negotiations 

Ministry of the Economy Mexico 

Trade in infrastructure services and regulatory measures

I. Introduction

1. This paper provides a reflection, from the Mexican perspective, on the relation between the regulatory and institutional framework for infrastructure services and trade policy in order to achieve growth and development goals. It develops from that perspective some of the questions proposed for discussion in session 5 of the above mentioned meeting, as a contribution to the debate on services, development and trade.

2. Services are a fundamental part of the Mexican economy. They represent more than

70 percent of our GDP and approximately two thirds of the employment (2008). There are more than 132,000 companies in the services sector, which represent 22percent of the total number of companies in Mexico. Although statistics on trade in services in Mexico still reflect a low participation in total trade (approximately 6 percent), trade in services grows faster than trade in goods and we already have some examples of successful sectors on trade in services, mainly in the Latin American region: telecommunications, entertainment, construction, financial, distribution, and ITC-related services. Foreign direct investment in services sectors in Mexico is more than 50 percent of the total, with a year average of 10 billion US dollars.

3. Development of more efficient services, and especially efficient infrastructure

services, such as ITC- related services, financial services and logistics services, is an important factor in the competitiveness of the manufacturing processes of a country, and consequently, it should also be an important element in its growth and development strategies and policies.

II. Regulation and policy of infrastructure services sectors in Mexico. 4. International studies show that, rated by quality and competitiveness of its

infrastructure, Mexico ranks in place 5 and 7 within Latin America. The World Bank estimated at the beginning of this Administration that, just to reach universal Access for basic services, to satisfy the growing demand and to give maintenance to the existing infrastructure, Mexico should increase its investment on infrastructure between 1.0 percent and 1.25 percent of its GDP.1 So one of the objectives in the National Development Plan for 2007- 2012 was to increase access, quality and competitiveness of infrastructure in order to rank Mexico among the 30 top countries in infrastructure, according to the World Economic Forum, by the end of this administration (2012). In order to achieve that, the National Infrastructure

1 Taken frorn the National Development Plan, see http://pnd.calderon.presidencia.gob.mx/economia-competitiva-y-generadora-de-empleos/telecomunicaciones-y-transportes.html

Program 2007-2012 considered the modernization of roads, ports, airports as well as the energy infrastructure, through a National Infrastructure Fund with the participation of the public and private sectors. From 2007 to 2009 Mexico has achieved record levels of investment in infrastructure, both in real terms and as a proportion of the GDP. In 2009, that investment represented 4.9 percent of the GDP, in line with the World Bank recommendation.

Telecommunication services

5. In 2009, Mexico had granted 26 concessions for basic local telecommunication services, 44 concessions for basic long distance telecommunication services, 649 allocations for the use of the spectrum, 1420 concessions for restricted television, 10 concessions for the transmission of satellite signals, and 41 concessions for triple play services. In 2009 we also started the bidding process for the use of part of the public electricity infrastructure to provide telecommunication services. Using 2009 statistics, tele-density in Mexico is 95.4 percent, with 18 percent of fixed telephony and 77.4 percent for mobile telephony. The number of Internet users is 28 million people and broad band penetration is still low, 9.2 percent.

6. The regulation of the telecommunications sector is responsibility of two entities:

the Federal Telecommunications Commission (COFETEL) and the Ministry of Communications and Transport (SCT). COFETEL is a decentralized administrative agency of the SCT, with technical, operational and budgetary autonomy. Its main functions include issuing administrative telecommunications regulations; giving opinions on the granting, amendment, extension and assignment of concession titles and permits; submitting the frequency band allocation programme for approval by the SCT; maintaining the telecommunications register (concession titles, tariffs, etc.) and proposing to the SCT the imposition of sanctions on those found to be in breach of the law or administrative regulations.2

7. The SCT is responsible for formulating general policy for the telecommunications sector; issuing the sector's regulations; proposing draft legislation for the sector; granting, amending and suspending concessions and permits for the provision of telecommunication and broadcasting services; and imposing on infringing enterprises the sanctions proposed by COFETEL.

Financial Services

8. During 2009 several reforms took place in the Mexican financial system, both legal and operational, in order to promote a greater protection for the consumers, to increase transparency and competition and to achieve a more effective prudential regulation and a better risk management in order to ensure soundness for the financial system. Another objective was to promote a greater access to financial services for all, what was called the democratization of the financial system.

2 Article 9 of the Federal Telecommunications Law, added in the latest amendment published in the Official Journal on 11 April 2006. Taken from Mexico´s Trade Policy Review, WTO Secretariat’s Report, 2008.

9. The Ministry of Finance and Public Credit (SHCP) has the primary responsibility for the regulation and supervision of the financial sector, as well as for setting the capital requirements of most of its participants. There are three specific regulatory agencies operating under the SHCP – the National Banking and Securities Commission (CNBV), which oversees the banking sector, securities market, and other credit agencies; the National Insurance and Bonding Commission (CNSF), which oversees insurance companies; and the National Pension Fund Commission (CONSAR), which oversees privately managed pension funds (AFOREs). SHCP is also responsible for the policy making in the financial sector, through mirror units within the Under- ministry of Finance and Public Credit.

10. The Mexican Central Bank regulates financial operations, the foreign exchange and derivative markets, and the payment system and serves as a reserve bank and lender of last resort to financial institutions.

Transport services

11. Infrastructure for air transport services in Mexico is formed by an airport network of 1,259 airfields, 59 international and 26 domestic airports. The SCT, mainly through the Directorate General of Civil Aviation is the main regulatory entity for the air transport sector, with responsibility for planning and implementing policies and programs for domestic airport development, granting concessions for operating air transport and airport services. Other state agencies concerned with the sector include Mexican Air Space Navigation Services (SENEAM), which provides air control and navigation services, and Airports and Ancillary Services (ASA), which is responsible for operating, managing and maintaining State-controlled airports.

12. During the present administration, investment in port services infrastructure has

increased more than 70 percent. In mid-2007, the 66 ports capable of handling high-seas freight were grouped into Integral Port Administrations (APIs), of which 16 are administered by the Federal Government and another five by state governments, while one API is in private hands. The SCT, through the General Coordinating Office for Ports and the Merchant Marine and its directorates general, is the main agency responsible for regulation, as well as for policy formulation and implementation in the maritime transport sector. Moreover, the SCT has responsibility for granting concessions for APIs and the provision of services in terminals, marinas and port facilities.

13. Road transportation services are regulated also by the SCT, through the Directorate

General of Federal Motor Carriers. They grant permits to motor carriers for cargo, passengers and tourism transportation and they are also responsible for policy design and safety standards issuance.

Energy services

14. In 2006, the energy sector contributed approximately 2.6 per cent to Mexico's GDP and 15.5 per cent to total merchandise exports.3 Private participation in this sector is still limited due to the State monopoly in hydrocarbons production and exploitation and the State monopoly in electricity generation, Petroleos Mexicanos (Pemex) and Comisión Federal de Electricidad (CFE). Nevertheless, in October 2008 an energy package of reforms was approved by the Mexican Congress. That package is still in the implementation process since part of the secondary regulation needs to be issued. Once fully completed, this reform will update the regulatory framework for the energy transition and sustainability.

15. The Ministry of Energy (SENER) is responsible, among other things, for managing energy policy and the activities of the sector's State-owned enterprises, granting energy-related concessions, authorizations and permits, and issuing official standards within its area of responsibility.4 It is also responsible for implementing government policy on attracting private capital into the sector. The task of the Regulatory Commission for Energy (CRE), a decentralized SENER agency, is to regulate activities in the natural gas, liquefied petroleum gas, and electricity sectors.

III. Trade negotiations in infrastructure services

16. Mexico is very active in international trade in services negotiations, at the bilateral, regional and multilateral levels. We currently have 11 Free Trade Agreements with 43 countries. From those, only the FTA with Israel does not have services disciplines. The structure of our FTAs generally splits the 4 Modes of supply in two chapters: one on Cross- Border trade in services, including Modes 1, 2 and 4, and one on investment, including Mode 3 and investment in goods, as well as an investor- State disputes mechanism. The link between the two general chapters is the list of commitments, which in most of our FTAs is built under the negative listing approach. Our legal framework related to international investment agreements is complemented with 28 Bilateral Investment Agreements (APPRIs) with 29 countries. Under Mexican jurisprudence, FTAs are part of the legal framework, under the Constitution and above domestic laws and regulations.

17. Besides our general Chapters on services and investment, we also have special

separate provisions for financial services, through a self- contained chapter with separate lists of reservations. Telecommunication services are complemented in some FTAs with an additional chapter with provisions related to the access and use of public telecommunication networks, value added services and standards in telecommunications. We also have a complementary chapter on facilitation for temporary entry and stay of business people in 9 of our FTAs, a couple of chapters

3 The data for the energy sector include the production of petroleum and its derivatives, the basic petrochemicals industry and the distribution of gas and electricity. Ejecutivo Federal (2007). Consulted at: http://www.informe.gob.mx/ESTADISTICAS_NACIONALES/. Taken from Mexico´s Trade Policy Review at the WTO in 2008. 4 Article 33 of the Law on the Organization of the Federal Public Administration of 29 December 1976.

on international maritime services with our European partners and a chapter on air transport services in our FTA with Chile. Within the general services chapter, we have included in two of our FTAs with Central American partners provisions related to the development of commitments for market access in road transportation services.

18. In terms of market access ambition, with the exception of NAFTA, the lists of

commitments presented in our FTAs reflect the current level of openness of the Mexican economy at the entry into force of each FTA, with a few well- justified exceptions. In that sense, no new market access is granted through international negotiations of services in our experience. Of course, an additional benefit is the possibility of consolidating in an automatic manner each new liberalization step which resulted from a policy decision, known as the ratchet clause. This clause provides an automatic liberalization without the need of successive rounds of negotiation and provides flexibility to the Mexican policy makers to decide when and how to take a new liberalization step without the pressure of trade partners in a negotiation process. That is to say, domestic regulation marks the pace of international trade commitments and not the opposite, which preserves the necessary policy space for the regulators and policy makers.

19. Besides the bilateral FTAs, Mexico participates in a number of regional initiatives

with trade in services provisions. For example, we are currently engaged in convergence negotiations with Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica, in order to have a single FTA with them, instead of the three FTAs currently in force. That has been useful to learn from other developing countries’ recent experience negotiating with developed countries and to push for a common denominator which usually has a higher level of ambition than that of single FTAs. Although negotiations are still not advanced enough to predict a certain outcome, an example of that might be the level of ambition in the telecommunications chapter or in the road transportation annex.

20. We participate also in other regional initiatives such as the one called Foro Arco,

among 11 developing countries from Latin America (Ecuador, Colombia, Peru, Chile Mexico, Panama and the five Central American countries from the Single FTA negotiations) aiming at achieving a higher level of integration of the region. The content of this initiative goes beyond trade liberalization negotiations, including the cooperation element which gives this interaction many new opportunities to strengthen the regional economic integration. A subset of 4 countries from Foro Arco (Mexico, Peru, Chile and Colombia) launched an initiative at the Presidential level known as Deep Integration Mechanism which is also trying to define a more ambitious agenda covering non- trade topics. Finally, it is worth mentioning the renewed discussions on trade services taking place under the Latin American Integration Association (ALADI), where there are two main components: one related to explore opportunities for liberalization or further integration among the most active negotiating Members and the other related to provide the least developed Members the opportunity to benefit from cooperation projects before fully engaging in liberalization discussions. In all those regional initiatives,

coordination with and sometimes direct participation from domestic regulators is necessary, mainly in the cooperation part of those initiatives, but in a more visionary way, cooperation among regulators from different countries could be a facilitator for deeper integration initiatives among developing countries.

21. At the WTO services negotiations we have found another positive opportunity to

interact with our regulatory institutions. Domestic regulations negotiations under the Working Party of Domestic Regulation (WPDR) require a close coordination with several domestic players from the regulatory framework. Market access negotiations also require a process of continuous consultations with the responsible areas of sectoral policy decisions, and some of those sectors are precisely infrastructure services sectors.

22. In general, we cannot say that international trade in services negotiations have

directly led to changes in the regulatory framework, although we have two important examples of the contrary in infrastructure services: the telecommunications dispute against the US under the WTO Dispute Settlement Understanding, and the trucking dispute with the US under NAFTA dispute settlement mechanism.

23. The first case was the telecoms dispute. In August 2000, the United States sought

consultations with Mexico, alleging that Mexico had adopted anti-competitive and discriminatory regulatory measures, had tolerated certain privately-established market access barriers and had failed to take needed regulatory action in its basic and value-added telecommunications sectors.5 In April 2002 a panel was established to settle the dispute.6 In June 2004, the WTO's Dispute Settlement Body adopted the panel's report, which concluded, inter alia, that Mexico: (i) had failed to ensure the application of cost-oriented international interconnection rates; (ii) had failed to impose regulatory measures to prevent anti-competitive practices on the part of the main telecommunications operator; and (iii) had failed to ensure access to and use of public telecommunications networks on reasonable and non-discriminatory terms.7

24. In June 2004, Mexico and the United States agreed that Mexico would implement the recommendations made in the panel's report, such as repealing the legal provisions establishing that the operator with the majority of outgoing international long distance (ILD) traffic should be the only one to negotiate international interconnection contracts. In 2005, Mexico began allowing the marketing (resale) of the international long ditance service.

25. On the opposite side of the equation, that is, identifying the main barriers that

Mexican infrastructure services exporters encounter in the international markets and

5 WTO document WT/DS204/1 of 29 August 2000. 6 WTO document WT/DS204/3 of 18 February 2002. Some claims, such as those relating to value added telecommunications, were withdrawn from the request submitted by the United States. 7 WTO document WT/DS204/R of 2 April 2004.

its interaction with the regulatory framework, we can mention the trucking dispute, which is still pending of a solution. Here, coordination between Mexican trade negotiators and the road transportation regulator was fundamental to define the Mexican strategy regarding the use of retaliation measures and the current negotiation of the technical aspect for the cross border provision of trucking services. A first step towards the solution of this long- standing issue was the implementation of a demonstration program in 2007. In order to comply with the requirements of this pilot program and to allow US carriers to enter into Mexican territory, a set of rules for foreign carriers had to be adapted and published in the Official Gazzette. With the current negotiations to land the agreement in principle announced by the Calderon and Obama, Mexico would have to review those 2007 rules again. In this process of knowing about each other rules, requirements and procedures, the previous work under the relevant NAFTA Standards Sub- committee was very useful to reach a common understanding regarding the scope and implementation of the regulatory framework of the programs.

26. On a broader sense, the task of identifying barriers for Mexican services exporters is

one where much work needs to be done. One problem we face on this matter arises from the lack of a comprehensive study on the Mexican services economy to properly identify services sectors with export potential. That would allow us to design the proper regulatory framework and cooperation projects to support the development of those services sectors. On the same order of ideas, the development of more accurate and disaggregated trade in services statistics is another challenge we need to overcome in order to improve our analytical tools on services trade impact in domestic regulations.

27. Finally, the need for direct feedback from the private sector when taking policy or

trade negotiations decisions is unquestionable. In this regard, we have started working with the Mexican services industry and with the academic sector interested in services to promote a more active coordination and cooperation mechanism designed not only to support international trade negotiations, but also to be a representative and useful way to know and address industry concerns related to domestic regulation. At the end of last year we could finally see the creation of the first Mexican Services Coalition, which has decided to start working in three main pillars of action: international trade negotiations, domestic regulation and policy, and improvement of both services and trade in services statistics.

28. In sum, we cannot speak only about trade in services negotiations or only about

regulatory frameworks in an isolated manner. Interaction of policy makers, regulatory institutions, trade negotiators, private sector and universities from one country and from our main partners is necessary for the design of an articulated and comprehensive agenda to develop infrastructure services sectors, and in the end, for a greater contribution of those services in growth and development goals.

IV. Conclusions

29. After sharing the Mexican experience from the point of view of a trade in services negotiator, we are certain that trade liberalization negotiations and development of infrastructure domestic policies are compatible goals providing that there is clarity on what element should drive the process at a certain point.

30. Another conclusion is that development of infrastructure services sectors needs to

be addressed using a comprehensive and coherent approach, not only with respect of the content (domestic and international issues), but also in relation to the relevant players and the way they interact. In this regard, it is important to develop a formal but flexible mechanism to receive inputs from regulators, policy makers, trade negotiators, trade and investment promotion agencies, and law makers, and to be able to design and implement actions at different levels of government to achieve a more universal access to benefits of this coordination.

31. Thirdly, we need to identify and take advantage of the benefits offered by

international cooperation among regulatory entities as part of bilateral, regional and multilateral initiatives in which we participate.

32. Finally, we have the challenge of using those cooperation and coordination

mechanisms to improve our knowledge and understanding of our own infrastructure services and trade in infrastructure services sectors, in order to take better informed decisions regarding the path we want to take towards growth and development.