IVA and Oil Reform – The Expert Take

Mar 04, 2013

By Duncan Wood, 3/4/2013

Last Saturday’s vote by the PRI party to change its statutes to allow for the application of the value added tax (IVA) to food and medicine, and to allow for increased private participation in the oil sector, significantly improves the prospects for the reform process under Enrique Peña Nieto. This marks an important victory for the reformers within the party, and is a sign that the government now faces minimal internal party divisions that could hold back the reform process. Although much bargaining and negotiation remains with the other parties, the fact that Peña Nieto can now move ahead to talk meaningfully with the other parties in Congress with a united party behind him strengthens his bargaining position.

The IVA decision is controversial as it is widely seen in Mexico as regressive, putting more burden on the poor who spend a higher proportion of their income on food and medicine, but it is viewed by economists as one of the few possible ways for the government to quickly boost tax revenue. This is, of course, particularly important in the light of rising government expenditure and of falling fiscal revenue from oil production. It was feared that the PRI rank and file could oppose such a measure, but they appear to have accepted the line from the party’s leadership. The party also noted the importance of other aspects of a fiscal reform, such as simplifying the process of paying taxes and cutting down on rampant evasion, leaving itself a wide range of options as negotiations on a fiscal reform progress.

On oil reform, the party agreed that the state would remain in control of Mexico’s energy resources. This phrase, “el Estado sea rector del sector petrolero” is important as it maintains the sovereign right of the state to determine how the sector is structured, without limiting it to a state-run monopoly. What’s more, the PRI has added a section saying it would “design mechanisms to generate greater private-sector participation in energy production.”

Of particular significance were comments made yesterday by Diputado Marco Bernal, chair of the Chamber of Deputies Energy Commission. Seen by some analysts as someone who has been less enthusiastic about far-reaching reform, his declaration that “We plan an energy reform that mulls an opening in areas where we don’t have the capacity to do it, so Pemex can make alliances with private capital,” opens the door to a broader rather than more limited government proposal on reform.

The government this week also unveiled the Estrategia Nacional de Energía (ENE) for the period 2013-2027. The document itself must be voted on by the 12th of April and must be either accepted or rejected but cannot be modified by the legislature. As such it will present a key test of the government’s ability to generate a consensus behind its emerging energy policy, and therefore an important insight into the prospects for energy reform.

The ENE itself is, as expected, a rather vague document that in fact gives us little detail about the government’s vision for the energy sector. However, the phrase that most analysts and journalists will focus on is of course the one referring to the role of the private sector in the oil and gas industry. The ENE states clearly that “To achieve the objectives put forth in this document, in both hydrocarbons and in electricity, the participation of the private sector is fundamental in those areas where the law permits… In this sense, the present strategy refers not only to state owned enterprises, which, although they play a crucial role, are not the only element that the country has to develop the sector.” This wording will draw considerable debate in the industry, particularly the words “where the law permits.” In the face of the PRI’s decision on Saturday, it seems that the government hopes to change the legal framework to significantly increase the scope for private sector activity.

Experts & Staff