CALDERON STAFFERS ON ECONOMIC POLICY ISSUES

UNCLAS SECTION 01 OF 03 MEXICO 005148 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/MEX, WHA/EPSC, EB/ESC DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW DOC FOR ITA/TD/ENERGY DIVISION DOC FOR4320/ITA/MAC/WH/ONAFTA/ARUDMAN TREASURY FOR IA (JASPER HOEK) E.O. 12958: N/A TAGS: ECON ENRG EPET MX SUBJECT: CALDERON STAFFERS ON ECONOMIC POLICY ISSUES REF: A. MEXICO 3609 ¶B. MEXICO 1492 ¶C. MEXICO 1174 Sensitive but unclassified, entire text. -------------- Summary -------------- ¶1. (SBU) In a September 7 session with Dr. Sidney Weintraub of CSIS, President-elect Calderon's transition team member Dionisio Perez Jacome (former head of Mexico's Energy Regulatory Commission (CRE)) and former Mexican Energy Secretary and Calderon advisor Luis Tellez described current SIPDIS Calderon transition team efforts to find high impact projects to win over the majority of voters, especially those in the Party of the Democratic Revolution (PRD),that did not vote for Calderon. This social agenda would control the early days of the Calderon presidency. Even over the long term, Perez and Tellez said the Calderon administration would move slowly on difficult fiscal, energy and labor reforms. Tellez told us that the Calderon administration would work with all affected government departments on policy initiatives rather than follow what he termed President Fox's "uncoordinated" approach. End Summary. -------------- Setting -------------- ¶2. (SBU) Econoff joined CSIS Dr. Sidney Weintraub's September 7 meetings with President-elect Calderon transition team member Dionisio Perez Jacome (former head of Mexico's Energy Regulatory Commission (CRE)) and Luis Tellez (former Energy Secretary to President Zedillo). Perez said he would be working on economic policy in the transition team including Energy, Telecom, Investment Promotion, Fiscal Reform, and Agriculture and Fisheries. Calderon's plan for the Sexenio (his term) would be ambitious. Tellez added that the real challenge would be in getting PRD supporters to understand that Calderon sought to take care of them. The transition team was looking for high impact social programs that could be done for relatively little political capital, while significant reform projects requiring more political heavy lifting would be deferred to later in the term. The Calderon team was continuing to list potential high impact social projects. -------------- High Impact Projects to Benefit the Poor -------------- ¶3. (SBU) The central theme of Calderon's election campaign was employment. According to Perez, the Calderon administration would not change that focus. To create jobs, Mexico needed more investment in infrastructure and to promote measures that improved its competitiveness. Additional progress was needed on rule of law issues. According to Perez, Calderon would be using the 100 projects proposal he published in the closing weeks of the campaign (ref. A) as a guide to his work plan in the first 100 days, though he would not seek to implement all provisions of all proposals in that document. For example, Perez believed that Calderon would move forward with the "Oportunidad EnergQtica" proposal to subsidize gas and electricity process for poor Mexicans. On the fiscal side, he would not be able to institute a flat tax in the short or medium term, but could introduce some regulatory or administrative changes to pave the way for its introduction. Of the 100 actions in the document, 30-35 could be done through amendments of existing laws or through administrative action, but the team would have to "find an equilibrium" between the depth of congressional involvement required and what could be accomplished realistically. Perez divided the issues with one-third being economic, a third social and the remainder "political." ¶4. (SBU) To benefit Mexico's poorer South, Calderon would propose specific work on education and health targeted to the region. He will also propose an extensive series of infrastructure improvements, particularly highways focused in the area. The largest project would be to readdress the MEXICO 00005148 002 OF 003 decision of the federal competition commission to stop the merger between Ferromex, which operates railroads in Northern Mexico and Ferrosur which operates railroads in the south and to allow the companies to cooperate on construction of a two track rail line across the Isthmus of Tehuantepec from Salina Cruz on the Pacific to Coatzacoalcos on the Gulf of Mexico to compete with the Panama Canal. Calderon also plans programs for small and medium sized businesses including a measure that would harmonize many government requirements. His programs would also give support to fisheries and tourism development. -------------- Longer term reforms -------------- ¶5. (SBU) Perez and Tellez agreed that in the longer term, energy, fiscal and labor reforms were essential. On both the energy and social agendas was "Oportunidad EnergQtica," a proposal to replace the current system of gas and electricity subsidies for all users. Also on the energy side, the Calderon administration would continue to press for the Pemex corporate governance reform started during the Fox administration (ref. B). He said strengthening the role of the CRE would also be important. They would be looking at electricity and natural gas tariffs to develop more flexible options. Luis Tellez added that the first steps to addressing the energy situation would have to be made in "feasible" areas like administering and strengthening the CRE. Tellez added personally that the GOM would have to find some way to better allocate risk between Pemex and its contractors in order to provide the contractors with more "upside" potential (i.e. beyond the current "Multiple Service Contract" model for partnership with outsiders) (ref. C). Perez noted that his personal project would be to allow companies controlled by Mexican States to operate those oil fields that are no longer profitable for Pemex. ¶6. (SBU) On taxation, Perez said he would be working to press forward on the flat tax rate that Calderon had raised during the campaign. This would be a gradual process both dropping rates and eliminating deductions. Perez admitted it would be difficult to maintain Congressional support. The Calderon team's initial thoughts towards eliminating the inherent regressive nature of a flat tax would be to exempt from taxation an amount of income five times the minimum wage. He noted that the flat tax effort was already facing opposition from Mexican accounting and law firms that stood to lose business. As part of Calderon's efforts to win over supporters, Perez suggested that Calderon would start during the first 100 days with proposals to allow families to file returns rather than individuals only, as is currently done; sending taxpayers partially filled out tax forms; and finding some way to reward Mexicans that have consistently paid taxes. ¶7. (SBU) On labor, additional flexibility was necessary, although Calderon had assigned labor to the "Political" side of the transition effort. Perez said he believed that Calderon would have to develop incentives to move workers away from the informal sector. He added that current Fox Administration programs like "Seguro Popular," which offered state health benefits to Mexicans de-linked to their employment status actually encouraged participation in the informal sector. Calderon's labor reforms would be linked to fiscal reforms. Tellez added that the problems facing Mexico were not so much the unions, but specifically the public-sector unions. Private corporations like Daimler Chrysler and Ford continued to make billions of dollars in investments in the country while negotiating sufficiently flexible labor contracts. The problem was more a lack of government will. Tellez said that the Fox administration had caved completely to union demands. The Mexico City power company, Luz y Fuerza del Centro (LyFC),was perhaps the worst offender with a labor contracts first negotiated in ¶1905. The company now loses $2.5 billion per year with "non-technical" electricity losses of 32% , with the company's union in charge of billing. -------------- Calderon will be different on Economic Policy -------------- MEXICO 00005148 003 OF 003 ¶8. (SBU) Tellez noted that the Salinas and Zedillo administrations were different from Fox's government. Under the previous Presidents, all economic decisions were taken in formal Cabinet sessions, but Fox has held few meetings. As a result, the economic decisions that affect several ministries at once, like those on infrastructure, frequently run into difficulties. Without coordination, Hacienda frequently is forced to speak out publicly as it did recently on a Fox proposal to construct a bullet train from Mexico City to Guadalajara. Tellez stressed that Calderon would not follow the Fox model. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity GARZA