MEXICAN CONGRESS MEMBERS DISCUSS ENERGY REFORM

UNCLAS SECTION 01 OF 02 MEXICO 000589

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STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
DOL FOR ILAB

E.O. 12958: N/A
TAGS: ENRG EPET ECON MX
SUBJECT: MEXICAN CONGRESS MEMBERS DISCUSS ENERGY REFORM


Sensitive but unclassified, entire text.

Summary
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1. (SBU) The Mexican Autonomous Technological Institute
(ITAM) January 22 hosted an energy conference on January 22.
The event drew over 100 people, including representatives
from all three political parties in Congress, the Mexican
Council on International Affairs (Comexi),academia and
policy institutes, as well as the private sector. Topics
discussed included an overview of the Western Hemisphere
energy situation, the relationship between energy and public
finances in Mexico,and finally a discussion of prospects for
reform among Members of the Mexican Congress End Summary.

Western Hemisphere Energy
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2. (SBU) The lead-off panel presented the Center for
Strategic and International Studies (CSIS) book Energy
Cooperation in the Western Hemisphere, edited by Dr. Sidney
Weintraub. The book has chapters on the U.S., Canada, Mexico,
Venezuela, Argentina, Peru, Brazil and Ecuador, Colombia,
Bolivia and Trinidad and Tobago. It focuses on political,
rather than technical obstacles to cooperation, within and
among countries of North and South America.


3. (SBU) In that discussion, Milton Costa, author of the
Brazil chapter (and President of Petrobras Mexico) was asked
what makes Petrobras different from Pemex. He replied that
because Brazil has little oil itself, Petrobras has always
been searching for more oil, rather than "administering oil
wealth" as Pemex has done since the discovery of Cantarell.
He argued that this resource limitation made it easier to
reach political consensus on investing in technology and
exploration that has made Petrobras a world leader. However,
he also said the process was very difficult and that key
reforms were passed during a "window of opportunity" of
legislative negotiations.

Oil and Public Finance
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4. (SBU) In a Panel discussion on Oil and Public Finance,
moderator, Journalist Macario Schettino opened with a
chronology of Mexico's failed efforts to expand its tax base.
Mexican tax collection amounts to less than 11 percent of
GDP, compared with close to 40 percent in Brazil; the
discovery of Cantarell allowed successive Mexican governments
to avoid fiscal reality and reform; and recent production
declines should force government to finally take decisive
action.


5. (SBU) Independent consultant Jorge Chavez Presa built on
Schettino's basic argument by providing extensive public
finance data. He maintained that oil has allowed Mexico to
artificially declare a surplus when the federal government
operating budget - taking into account only tax income - is
actually in a huge deficit. Because the parastatal sector
makes so much money, the finance ministry can simply
manufacture a fiscal balance. National Action Party (PAN)
Senator Gustavo Madero followed Chavez Presa by stating that
Mexico's lack of tax policy has increased its dependence on
oil, and that this has exposed the country to a fiscal crisis
when production falls off.


6. (SBU) Commentator Isaac Katz, an ITAM economics
professor, reiterated the political point that oil resources
had undermined any political incentive for reforming the
fiscal regime, and that the huge oil bonanza has made states
and municipalities increasingly dependent on federal revenue
transfers. He argued that in the future, in the absence of
fundamental reforms, Mexico must expect falling revenues
(because of oil production decline) and increased
expenditures (Pediregas or off-balance-sheet financing,
pension liabilities, etc). Katz concluded that Mexico must
pursue two measures: fiscal reform and private investment in
Pemex.


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Legislators Views
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7. (SBU) A Panel on Legislative Perspectives included three
Senators from the Senate Energy Committee: Francisco
Labastida, Institutional Revolutionary Party (PRI) who is
President of the Committee, Jorge Ocejo (PAN) and Arturo
Nunez, Democratic Revolutionary Party (PRD). The panel also
included Manuel Alonso Lizaola another PAN deputy.


8. (SBU) Ocejo's presentation reviewed regulatory challenges
to reforming Pemex, and usefully included specific laws that
should be amended. His basic proposal was "flexibility and
autonomy" for Pemex. He also insisted on the political
principle of pursuing small but cumulative gains, and to
"avoid all-or-nothing proposals." Ocejo suggested that
Congress should proceed step by step in areas where there is
the potential for consensus, such as institutional autonomy,
rather than trying to open up the oil sector all at once.


9. (SBU) Labastida reiterated the basic narrative that
preceded and stated that the urgency of the problem required
a speedy legislative response. Moderator David Shields
prodded the PRI Senator by suggesting that the Pemex union
was controlled by the PRI, and asked whether the union shared
his sense of urgency for reform. Labastida responded that
while the union included many PRI members, it was not PRI's
property, and that union support for reform would depend on
the nature of the reform.


10. (SBU) Nunez argued that Mexico's energy policy had long
been subordinated to fiscal policy, and called for a "second
oil expropriation," only this time from Hacienda. He also
reiterated the earlier point that Mexico's energy problem
cannot be resolved without fundamental tax reform. He
specifically proposed legislative action to strengthen the
Ministry of Energy vis-a-vis Ministry of Finance (Hacienda).
He concluded that there was considerable agreement among the
parties on the diagnosis of the problem, and that what
remained was to agree on how to solve it.


11. (SBU) In the question period, one audience member
complained that there was too much diagnosis and not enough
real debate within Congress about substantive options.
Labastida responded that the best way to proceed is through
debate among Congress members, but not out in the open. He
argued that only when some degree of agreement is reached
through internal discussion should a proposal be put on the
table in public.


12. (SBU) Former Senator Silvia Hernandez (PRI),discussed
the need to build "alliances" around energy reform. She also
urged the conference organizers to promote awareness-building
on sustainability and fiscal issues related to the oil
sector, in order to influence public opinion about reform.


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