Mexico’s competition policy: the journey towards maturity

1. Mexico’s competition policy: the journey towards maturity Eduardo Pérez Motta March 2012

2. Lack of competition has long been a major obstacle to economic growth in Mexico … “Lack of competition, particularly in the provision of basic inputs for production … propitiates the deficient performance of other factors. Elimination of existing barriers to entry is urgent.” “To stimulate firms’ productivity and improve their competitiveness more competition in markets is required.” “Mexico’s competition environment, regulatory framework and investment climate are major priority areas to increase Mexico’s competitiveness.” The World Bank “Mexico needs stronger competition and better regulation to boost productivity and growth.” “Strengthening competition (…) should also have high priority, and –as international experience has shown- may also facilitate reform in other areas as well as helping equity.” “Mexico’s goods markets suffer from inadequate (foreign and domestic) competition conditions, with overregulated and rather closed key economic sectors. Only by addressing these challenges can Mexico begin to fully leverage its important competitive advantages.” Fuentes: Banxico, Presentation by Governor Guillermo Ortiz to the British Chamber of Commerce, December 6, 2007 IMCO, Punto de inflexión: Situación de la competitividad de México 2006 World Bank, Mexico 2006-2012: creating the foundations for equitable growth, June 2007 OECD, Economic survey of Mexico, 2007. IMF, Mexico: Staff report for the 2007 Article IV consultation WEF, The Global Competitiveness Report 2007-2008.

3. … holding back overall competitiveness … WEF Global Competitiveness Index by variable Sorted from worst to best relative position for Mexico, 2011 Competition-related variable 1 Mexico’s overall position: 58 82 29 Total variables Competition variables push down overall position 21 6 Competition-related variables Source: World Economic Forum, The Global Competitiveness Report 2011-2012; own analysis.

4. … and reducing real incomes, especially for the poorest population Rural population Consumer welfare loss due to competition problems in seven goods markets* % of total expenditure by decile of households Urban population Potential increase in household incomes if competition boosted in these markets * Maize tortillas; soft drinks, juices and water; beer; pharmaceuticals; milk; processed meat; chicken and eggs. Source: Own analysis based on Carlos M. Urzúa (2008). “Evaluación de los efectos distributivos y espaciales de las empresas con poder de mercado en México”, ITESM-CCM and INEGI, Encuesta Nacional de Ingresos y Gastos de los Hogares 2006.

5. Competition policy in Mexico has just begun to emerge as a force … Federal Law of Economic Competition enacted Milestones Bylaws to Law published 1st reform to Competition Law 2nd reform to Competition Law 1993 1998 2006 2011 Life cycle phase Procedural strengthening Raising profile No competition policy Institution building • Anticompe-titive conduct legal • Artificial barriers to entry as policy • Competition culture absent • Lack of specialized expertise • No legal precedent • Emerging Internal procedures • First steps towards judicial understanding • Expansion of the Commission • Incipient public awareness • Insufficient powers of dissuasion • Increased engagement with other regulators Main issues

6. … with the benefit of building on a solid analytical and institutional platform • Economic efficiency sole objective of law. • Best-practice analytical standards: • Per se prohibition of hard-core cartels • Unilateral conduct subject to rule of reason • Pre-merger notification for large operations Analytical framework Institutional setting • Statutory independence of authority • Collegiate decisions taken by 5-person Plenum • Commissioners isolated from politcial pressure: • Staggered, irrevocable, non-renewable 10-yr terms • Internal checks and balances

7. Effectiveness of competition policy hinges on its ability to successfully dissuade anticompetitive conduct • Compe-tition culture • Judicial track record Effectiveness: Ability to have decisions upheld by courts Transparency: Guidelines, publication of decisions Legal certainty • Cost of infringement Enforcer’s toolkit: Sanctions, investigative tools, suspension powers Track record: Proven willingness to apply law Enforce-ment threat Awareness and support: Public backing, influence in policy-making process

8. Over the past years, the CFC has acquired an enhanced enforcement toolkit … Main features of May 2011 reforms to the Competition Law Prior to reform After reform US$7 million 10% of annual domestic revenues Maximum fines None 3-10 years for hard-core cartels Criminal sanctions Pre-announced, only previously requested info Surprise, all info related to the investigation On-premises searches None Suspension if risk of irrepara-ble harm to competition Cautionary measures Settlements Uncertain, hard to apply Clearer powers, easier to apply

9. ... demonstrated willingness to enforce the law aggressively … Illegal conduct cases and fines imposed by the CFC Moving average (4 periods) • April 2011: América Móvil fined MX$ 11,989 million (US$ 1 billion) for margin squeeze related to mobile inteconnection fees charged to other phone companies (currently under appeal) • AMX has 70% market share in mobile telephony (90 million users overall) • Substantial difference in on-net vs off-net interconnection fees • CFC/OECD (2009) estimate US$ 6 billion yearly damages to consumers, due to interconnection rates 40% above OECD average Cases sanctioned Fines (MX$ millions)

10. …improved its track record in judicial review of its decisions … Judiciary engagement strategy % of judicial challenges resolved in CFC’s favor • Bolstering reasoning in CFC decisions • Reallocation of resources to technical units • Deepening of multidisciplinary approach • Improving communication of reasoning • More attention to drafting of decisions • Added emphasis on oral statements • Mutual education • Judges: Workshops with international peers  better understanding of technical aspects • CFC: Conferences imparted by judges  Internalization of judicial criteria • Added certainty due to 2006 law reform • Procedures and standards modified to conform to judicial rulings

11. … and provided added legal certainty about enforcement standards and criteria Public consultation on transparency needs (February-April 2010) Actions Status  7 documents published (ex. market definition & power, leniency, fining)  New search engine (complete history of CFC decisions) Access to CFC documents 2011 Winner, Innovation in Govt. Transparency Award(awarded by IFAI, WB)  Status (phase, period) displayed in search engine Status of ongoing procedures  Sense of vote by each Commissioner published Plenum’s decision-making process  Included in reforms, procedure at design stage Oral hearings  Impossible for confidentiality reasons Access to case files Guidelines and criteria

12. The CFC has also worked to foster competition culture in Mexico … Main policies to foster higher levels of investment in MexicoSurvey of private sector economists % of responses, moving average (six periods) Fiscal reform Energy reform Labor market reform Public safety Competition and regulatory framework Rule of law Infraestructure Macroeconomic stability Source: Banco de México, Encuestas sobre las expectativas de los especialistas en economía del sector privado 2003-2011

13. … and to promote competition-friendly regulation Individual pensions Telecommunications Airlines Elimination of fees on inflows Harnessing convergence for competition Authorization of entry for low-cost carriers Average fee% of assets annually Price, triple-play packagePesos/month Domestic flight passengersMillions Low-cost carriers Others Mexicana Aeroméxico 688.7 millon pesos in savings for workers Source: CONSAR, Situación del Sistema de Ahorro para el Retiro, April 2009 Source: El Semanario, Audiencia, vienen buenas noticias, 21/5/2009, p.7 Source: Own calculations with data from SCT-DGAC, 1998 - 2010

14. There are clear signs these developments are starting to realign economic agents’ incentives Leniency applications before the CFC Since passage of reforms by Congress (April 28) • High-profile cases • Drug procurement • Fuel surcharge Higher fines + criminal penalties Leniency enshrined in Law Legal certainty Credible threat Real cost

15. Significant challenges remain, some of them a direct result of developments over the past years … • Changes to bylaws to reflect reformed law • New Plenum / staff division of labor • New procedures (ex. oral hearings) • New tools (ex. on-premises searches) Implementation of reforms • Issue left pending for further reform • CFC will aim for swift, balanced and in-depth review of agency’s decisions by specialized judges and courts Specialized judicial review • Effort to secure additional resources has resulted in 30% increase in authorized staff for 2012 • Next challenge will be to recruit and train staff CFC’s resources • Additional guidelines prescribed by legal reforms (currently on course) • Ex post evaluation needs to be tackled Transparency and accountability

16. … and competition considerations have yet to become a central plank for the design or review of public policy The Australian example Presumption: Universal application of competition principles Exceptions have to be justified by reasons fo public interest Minimal regulatory burden Fuente: National Competition Policy, Report by Independent Committee of Inquiry (Reporte Hilmer), p. 87

17. The CFC aims to assist other young Latin American agencies in replicating its journey • Latin American Regional Competition Center • Founded in September 2011 • CFC developed, facilitates and provides platform • Members: 14 Latin American competition agencies • Initial funding from World Bank, IDB • Core services: • Expert advice • Training • Guidelines and criteria • Market studies • Hub • Scale • Contacts • Knowledge