Viewpoint: Reconciling Energy and Political Reform in Mexico

By Rubén Kraiem

Mexico’s energy reform will need to be carefully—and convincingly—reconciled with other recent changes to the Constitution, writes Covington & Burling’s Rubén Kraiem.

Energy policy connects inextricably to history and identity in Mexico. President Lázaro Cardenas’ 1938 expropriation of oil concessions has iconic significance: the state reclaiming sovereign control over the nation’s economic destiny. Oil firm Pemex is among the most powerful, if not the most powerful, economic arms of the state. While the need for reform has long been understood, challenging Pemex’s monopoly and opening the sector to private sector participation has been, to borrow an American expression, the third rail of Mexican politics.

Seen in that light, the constitutional reform approved in December, which allows Pemex to enter into risk- and/or production-sharing agreements with private companies while directing that new areas for exploration be open to global players, was not only the crowning achievement of President Enrique Peña Nieto’s first year in office. It was Mexico’s most sensitive and ideologically divisive reform in 75 years, and certainly the most momentous policy innovation, politically and economically, since the North American Free Trade Agreement. For that very reason, the legitimacy and legality of the reform should be beyond question.

Why make this point? Because energy reform, aside from facing any number of implementation challenges (e.g., ensuring the transparency of contracting and financing mechanisms to be put into place), is on a collision course with another recent change to the Mexican Constitution: the introduction of the ballot initiative, or consulta popular, as a form of public participation in decision-making. Under Article 35 of the Constitution, as amended in 2012, every citizen has the right “to vote on ballot initiatives pertaining to matters of national consequence.” The initiative may be proposed by the president, a third of the members of either house of Congress, or, most importantly, citizens representing at least 2 percent of eligible voters. Left-leaning opposition parties, led by the Party of the Democratic Revolution (known as the PRD), have taken this up as their banner for the 2015 mid-term election. Now the question is whether energy reform, as contained in the recent amendments to Articles 27 and 28 of the Constitution, is itself subject to reversion by ballot initiative. In other words, can a single yes/no proposition be framed and put to a vote that would modify, defer, or even revert the reform?

The answer to the question, many have argued, is “no,” for at least two reasons. The first is that, by the express terms of Article 35, ballot initiatives cannot be introduced with respect to matters of state revenue and expenditure; in other words, they cannot apply to fiscal matters. And it just so happens that the new (and very critical) provisions of Article 27 of the Constitution, which allow for contracting with private sector entities, are prefaced by reference to “the goal of obtaining revenues for the State that will contribute to the Nation’s long-term development…” So the reform itself, it is said, falls under the fiscal exclusion.

While some observers give credence to this argument (including prominent U.S.-based analysts), its obvious weakness is that it goes too far: Any number of policy measures, if they are meant to add in due course to government coffers and the general welfare—as most of them do—could be dressed up as revenue or fiscal initiatives. By plugging in language that is aspirational rather than operative, virtually any legislative change could be protected from challenge. If this is the reason why a ballot initiative is avoided, a large sector of the electorate will no doubt view this as a triumph of form over substance: a politically inspired maneuver to circumvent the law.

A better argument is that, while a ballot initiative can speak to policy issues presented to the legislature or decided by the executive (and the results of the initiative can bind the legislature and the executive), it cannot apply to a constitutional reform. The process of amending the Constitution goes through the various state legislatures, which are themselves sovereign: it is not clear that their actions could be reverted by voter action at the federal level. This, on the face of it, is a much more plausible argument: there is an actual substantive point here, which goes well beyond the form of language that happens to be used in the reform. And it has support in legislative history. Some of the political reform proposals that were made leading up to the final vote in 2012 contemplated a variety of other mechanisms, such as a popular referendum, that were expressly intended to apply to constitutional matters. But Article 35 did not ultimately include this change.

Finally, the fact remains that the Mexican Congress has still not approved implementing legislation on the actual mechanics of a ballot initiative. A bill approved by the Chamber of Deputies has not yet made it through the Senate. This, again, raises the issues of transparency and legitimacy. Will the bill be modified ad hoc to fit this specific situation? Will it simply be blocked from passage? Does that preclude action by the judiciary?  These are all still open questions.

So the decision as to whether a ballot initiative can proceed, assuming the question is ultimately presented (as is likely), will be made by Mexico’s Supreme Court, a body that has in recent years acquired greater autonomy and profile in matters of national consequence. Interested observers, analysts, and potential investors would be well advised not to pre-judge the outcome. There are genuine issues of constitutional interpretation that only the judiciary can resolve.

This, admittedly, will create some uncertainty in the short to medium term. But it is better to tolerate that uncertainty than to cut it off with subterfuge. In the long term, what is most important is that and that the legitimacy of the reform should be beyond doubt. If a ballot initiative does not proceed, the reason should be well understood and widely accepted as legitimate and defensible. If it does, then all who are supportive of the reform should focus on communicating its eventual benefits and winning the voters’ hearts and minds. A triumph on that front would itself be a hugely significant step in the country’s democratic transition to full modernity.

Rubén Kraiem is a partner at Covington & Burling, LLP and leads the firm’s corporate practice in Latin America. He has contributed articles to Examen, Latin Finance, LatinLaw, The Miami Herald, The Houston Chronicle, the Asian Wall Street Journal, Crítica, and Foreign Policy.