MexECON Blog

Telecom Reform Signed Into Law

On June 10, President Enrique Peña Nieto signed into law a major reform of Mexico's telecommunications industry.  The Mexican economy has long been held back by monopolies and oligopolies in important industries.  For example, the firm América Móvil reportedly controls some 75% of the country's fixed-line telephone service and 70% of its mobile telephone and broadband service.  The television companies Grupo Televisa and TV Azteca account for virtually all over-the-air broadcasting.  Many economists believe these large, powerful companies snuff out competition, raise prices, and discourage innovation and investment.  The new reform aims to tackle those problems by boosting competition.

Below is a summary of the new law's major provisions.

New Telecom Regulator.  Mexico's main anti-monopoly agency is the Comisión Federal de Competencia Económica (CFCE).  That agency is currently complemented by a telecom regulator that is widely panned as weak and ineffective.  The new law replaces the current telecom agency with an entity called the Instituto Federal de Telecommunicaciones, otherwise known as "Ifetel".  The new agency is charged with promoting competition in the telephone, television, broadband, and radio industries.  It is empowered to establish rules in a range of areas such as quality, pricing, ownership, and infrastructure sharing.  It has the power to investigate any indications of anti-competitive behavior, and in order to stop such behavior, it can take steps ranging from levying fines to ordering a dominant firm to divest assets.

Streamlined Legal Process.  Legal hurdles have been a major impediment to Mexico's current telecom regulator.  Even when the regulator has tried to stop anti-competitive behavior, the dominant incumbent firms have been able to delay sanction by taking advantage of the country's slow, inefficient legal system and rules blocking the enforcement of regulatory decisions while they are being challenged in court.  The new law sets up special courts to handle disputes in the telecommunications industry, based on the assumption that more efficient processes and dedicated judges with expertise in the industry will help make regulatory action swift and sure.  Just as important, the law allows Ifetel to enforce its decisions even while they are being challenged.

Access to Network Infrastructure.  Currently, a key impediment to smaller, newer competitors in Mexico is that the dominant incumbents charge high interconnect fees and otherwise limit access to their networks.  Under the new law, Ifetel will be able to require firms to make their networks accessible at competitive prices.

New "Carrier of Carriers."  In addition to easing access to the incumbent networks, the new law aims to eventually create a "carrier of carriers" network that would allow newcomers to bypass the incumbent networks altogether.  As Mexico's television stations transition to a 100% digital format, the government will reacquire bandwidth and use it for the new, nondiscriminatory, universal-access network. 

New Television Stations.  To counter the current duopoly in broadcast television, Ifetel will auction bandwidth for two new television stations.  It is charged with releasing the bidding terms and conditions for the auction within 120 days of the agency's establishment.  However, licenses will not be granted to any firm that is controlled by an entity that already has 12 MHz or more of bandwidth in any locality.  The government will also establish a new public television network.

Easier Foreign Investment.  Currently, foreigners are not allowed to own more than 49% of any Mexican land-line telephone or cable network.  Foreign ownership of broadcast television networks is also restricted.  To further promote the entry of new competitors, the new law allows for unlimited foreign ownership in telephone services, broadband, and satellite television, and it raises the limit to 49% for over-the-air television stations. 

The new telecom law is another product of the "Pact for Mexico," an agreement among all three of the country's major political parties to push through needed reforms.  The Pact has already led to an important reform of the Mexican education system, and in the coming months it is expected to lead to big changes in the financial services, energy, and transportation industries.  Some legislators from opposition parties have started to chafe at the continued cooperation under the Pact, but passage of the telecom law is a welcome sign that the overall consensus for reform is still intact.

In theory, the new law should boost competitive pressure in Mexico's telecom industry, lowering prices, improving quality, and sparking new innovation and investment.  However, it is important to remember that much will depend on follow-on legislation and rulemaking.  If implementation of the reform is delayed or poorly managed, the benefits may be less than hoped for.  One sign of potential trouble is that legislators in the Mexican Senate tried hard to water down the legislation by making it easier for former politicians and former employees of telecom firms to become regulators.  That highlights the risk that the regulator could become politicized.  In sum, the telecom reform seems to be a step in the right direction, but only time will tell how much it will really improve Mexico's telecom services market.

Patrick Fearon, CFA
Vice President, Fund Management

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