Trust Critical for Mexico Energy Reform Success

by Karen Boman, Senior Editor

The increasing lack of trust in Mexico’s governmental institutions and their ability to apply rules presents a challenge as the country continues to implement energy reform.

Without trust of authorities, no public policy or reform can really succeed, said Ana Elena Fierrao Ferraez, dean of the masters in administration and public policy program and professor at Centro de Investigacion y Docencia Economics A.C., during an event at Rice University in Houston. The event, “The Rule of Law and Mexico’s Energy Reform”, explored how the rule of law in Mexico and energy reform intersect. Ferraez and other experts shared findings from essays they had written on the subject.

In 2015, The Corruption Perception Index published by Transparency International ranked Mexico 95 out of 167 countries in terms of being perceived as corrupt; Mexico had a score of 35 on a scale of 0 to 100, Ferraez noted. The lack of trust stems from the belief that business contract awards are based on personal relationships, rather than rules and processes of institutions, Ferraez said. This has created concerns that fair trade cannot occur.

Mexico has taken steps to address corruption issues; earlier this year, Mexico’s Congress passed an anti-corruption law, amending its Constitution to strengthen oversight of public officials and designate a special prosecutor to tackle corruption. However, some critics expressed concern that the law was just a “facelift” for existing institutions and won’t address the low rate of prosecutions for corruption in Mexico.

“It’s not enough to prosecute bad civil servants,” Ferraez noted. “The legal system must give equal treatment to all, and give access to public information to all. We have to guarantee that the rule of law is the rule and not an exception.”

Transparency and accountability of public institutions and processes will be particularly important if Mexico is trying to attract foreign and private investors to make significant financial investments in Mexico’s energy sector, Ferraez stated. Part of having transparency and accountability includes publishing information on energy reform to meet international standards that is accurate, reliable and usable by all parties. This is needed to ensure fair competition.

Another change that needs to occur in public resource management is accountability for audits. Right now, the law isn’t clear on what would happen if an audit uncovers bad results, Ferraez said. Mexico’s general accounting office needs to able to effectively audit companies, and set incentives for public companies to act in an effective and productive manner, as outlined in Article 25 in the Constitution.

Alejandro Ponce, chief research officer with the World Justice Project, also touched upon how trust and investor perspective could impact energy reform. The possibility that a state may not follow the rule of law poses a risk for companies investing in that state. The issue of what happens if someone is faced with a situation, such as an official wanting a bribe, and what happens if that person does or doesn’t give the bribe, is another issue.

Ponce, who defined the rule of law as the definition of a government’s power and what allows the government to limit the actions of various members of its society, said the World Justice Project measures the rule of law in countries around the world. According to the findings of the group’s Open Government Index 2015 report, Mexico ranked 42 out of 102 countries in terms of the openness of the nation’s government. In terms of publicized laws and government data, Mexico received a score of .43 – with zero being the least open and 1 the most open – and ranked 64th in this area. In terms of right to information, Mexico scored a .61, or a global ranking of 29. In terms of civic participation, Mexico ranked .56, or 67th worldwide, and for complaint mechanisms, Mexico came in at .62, or 34th globally.

“An open government – conventionally understood as a government that shares information, empowers people with tools to hold the government accountable, and fosters citizen participation in public policy deliberations – is a necessary component of a system of government founded on the rule of law,” the group said in the 2015 report.

According to Cambridge, Mass.-based National Bureau of Economic Research, transparency in government institutions and processes encourages foreign investment.

“Without exception, a country’s lack of transparency is associated with lower exposure of emerging market funds,” according to a NBER working paper “Transparency and International Investment Behavior“, written by R. Gaston Gelos and Shang-Jin Wei.

According to Gelos and Wei, in terms of attracting needed foreign capital, a lack of transparency indeed may affect economic performance by repelling international investors.

“There is relatively clear evidence that low transparency … tends to depress the level of international investment.”

Rigzone reported last year that anti-corruption strategies would be critical for companies looking to navigate Mexico’s energy sector.

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