Mexican standoff

Virtually a folk hero, Vicente Fox swept into office with a mandate to enact bold reforms. But he’s gotten waylaid by recession, political opposition and his own missteps. And impatience is mounting.

Virtually a folk hero, Vicente Fox swept into office with a mandate to enact bold reforms. But he’s gotten waylaid by recession, political opposition and his own missteps. And impatience is mounting.

By Lucy Conger
December 2001
Institutional Investor Magazine

It was a heady moment for Vicente Fox and his country. On September 5 Mexico’s first opposition party president in seven decades joined his fellow head of state George W. Bush in the White House Rose Garden for a joint press conference marking the U.S.'s support for an upgrading of the legal status of the more than 3 million undocumented Mexicans working in the U.S.

This was a personal triumph for Fox, who had been urging Bush to grant Mexican aliens working papers, and it reflected the new, cozier relationship between the U.S. and Mexico and the bond that has developed between the two folksy, businessmen-rancher politicians. That night Fox and his wife, Marta Sahagún de Fox, were fêted at the first state dinner hosted by George and Laura Bush. In an effusive toast Bush declared that “the U.S. has no more important relationship than that with Mexico.” A new era of amity and economic cooperation appeared to be dawning in the often troubled relations between Mexico and its neighbor to the north.

Alas, the warm glow engendered by the Fox public relations coup was short-lived. The World Trade Center terrorist attacks just six days later rapidly redefined the U.S.'s agenda, dooming Mexico’s diplomatic ascendancy, as Bush beat a hasty retreat from his splendidly provincial unilateralism to drum up a global coalition against terrorism. Even as his attention shifted overseas, the U.S.-Mexican border suddenly became a serious security concern, eclipsing other bilateral issues. Then the already stumbling U.S. economy was sent reeling, pulling down Mexico,s, since the two economies have become joined at the hip.

The events only served to highlight an emerging pattern of great promise and even greater frustration for Mexico and its charismatic president. Fox may have just been named the “sexiest world leader” by People magazine, but he has plenty of troubles back home. He appears to be losing his previously deft touch as a populist communicator and needs to act more decisively to revive the hopes of everyday Mexicans for change. That’s what got him elected in the first place.

The initiative that he deemed to be the linchpin of his economic agenda , fiscal reform , now appears likely to emerge in a watered-down version, making for less tax revenue and raising financial as well as political doubts about Fox’s whole, ambitious list of campaign promises. These called for everything from boosting economic growth to 7 percent annually to creating 1.3 million jobs a year to bettering the lot of Mexico’s 40 million poor to revising labor laws to revamping energy policy to rooting out corruption to luring more foreign investors to Mexico.

One year after his resounding election victory in what most Mexicans saw as a mandate for sweeping reform, Fox faces a harsher reality than he or anyone else could have foreseen. Mexico is in sharp recession. Oil prices are way down. The country’s bickering Congress is badly divided. The emboldened press has begun sniping at him. Politics has a new, unfamiliar dynamic, and his political adversaries occupy key positions in Congress and the bureaucracy. Friendly neighbor America is preoccupied with fighting terrorism. Cabinet ministers are squabbling in public, and Fox is being blamed for lax management. Ordinary Mexicans, who had elevated Fox to the status of a folk hero, are growing disillusioned. As Fox himself told Institutional Investor during an interview last month (see interview below): “These realities have brought a more demanding citizenry that asks when will there be accelerated development in Mexico.” He hastened to add, “Everything is in place to return to high rates of growth the moment the leading economies of the world grow.”

None of the new realities bode well for a president facing midterm congressional elections in less than two years that will likely determine his legacy. The hope, of course, is that his Partido de Acción Nacional can win the July 2003 contest, assuring Fox of the majority he needs to push through his reform program. Just as likely, if there is no economic resurgence, the elections may simply perpetuate the current legislative deadlock , no party has a majority in either house of Congress , turning the president into a lame duck for three years.

“We,re back into the austerity and adjustment fatigue syndrome,” Federico Estévez, a political scientist at the Instituto Tecnológico Autónomo de México, says ominously. “That’s what Fox is going to the election with.”

Not so surprisingly for a president trained as a marketer who once ran Coca-Cola de México, Fox,s greatest accomplishments to date have been mainly in the public relations realm. Early on in his term, Fox expended some of his political capital to gain passage of an indigenous cultures, rights law, allowing him to deal with (for now) the Zapatista rebels in the state of Chiapas. Then in October he persuaded all three of Mexico’s main political parties to sign a National Political Development Pact that purports to be a blueprint for economic, social and political progress. But analysts promptly discounted it as a political document. “It’s completely politically correct,” says Alejandro Hope, a political analyst with Grupo de Economistas y Asociados, a research center in Mexico City. “The agenda is so general that there’s no cost to the parties. There is not a single hard commitment about time periods or mechanisms.”

But Fox has also enacted more substantive measures. He was able to implement modest but straightforward financial and stock market reforms; extend the social safety net to provide food and health benefits and educational subsidies to an additional 900,000 families in extreme poverty as well as provide college scholarships for 100,000 poor kids; and crack down on drug traffickers. Abroad, Fox secured the International Monetary Fund’s approval for a $17 billion contingency credit line, stepped forward as a spokesman for Latin America and, of course, forged ties with his American amigo, George W. Bush.

And to his lasting credit, Fox has also presided over a calm transition from the long-ruling Partido Revolucionario Institucional. “After 71 years, for the first time, we have a democratic government in the country, a government that does not have a majority in Congress, and even so, through political dialogue, via the seeking of consensus, we can talk of broad agreements,” says Fox.

The president’s No. 1 priority, for now and for the foreseeable future, is the economy. Mexico’s blessing, and bane, is its ever-closer ties to the U.S. through the Nafta free-trade agreement. Ninety percent of Mexico’s exports now go to the U.S., and exports account for one third of its $600 billion GDP. Fully 73 percent of Mexico’s imports come from up north. Most tourists in Mexico are American, and so are the overwhelming majority of the country’s foreign investors. As the U.S. boomed in the latter part of the 1990s, so did Mexico. In 2000 its economy grew a remarkable 6.9 percent.

Unfortunately, when the U.S. economy gets hurt, Mexico’s feels the pain. “There’s a clear Nafta relationship in cycles,” says Mexican Finance Ministry spokesman Raúl Martínez Ostos with guarded understatement. Mexico has slipped into recession. After zero growth in the second quarter of 2001, the economy shrank in the third quarter, will contract again in the fourth and is projected to show negative growth of 0.1 percent for the year. Mexico has lost some 500,000 jobs in the formal economy, and who knows how many in the off-the-books economy. Orders keep falling in the dynamic export sector, as many assembly plants close. And many Mexican migrant workers may return home post,terrorist attacks because of the slump in the U.S.

Even good news is tinged with bad. The country earned a ringing endorsement when Citigroup announced in May that it would shell out $12.5 billion to buy banking giant Banamex , and then said recently that it was chopping 3,600 jobs. Ordinary Mexicans are suffering economic distress.

For all that, Mexico is no Argentina or Brazil. Solid financial management under Fox’s predecessor, Ernesto Zedillo, is helping it to weather the global economic storm. Beneath the grim recessionary surface are healthy fundamentals. Mexico’s foreign exchange reserves are at a record high of $39.5 billion and downward-trending inflation is under 6 percent. The current-account deficit is officially less than 1 percent, although if public sector borrowing is factored in, that figure rises to as much as 4 percent. Public foreign debt has been whittled to 13 percent of GDP (it peaked at more than 60 percent in 1986,,87).

Foreign investors demand less than one third as much of a risk premium on Mexican bonds as they do on Brazilian bonds. Meanwhile, the Mexican peso has been one of the most robust currencies in the world in recent months (after a roller-coaster dip in September). Through November it had appreciated 5 percent against the dollar for the year. Most analysts say continued enthusiastic foreign direct investment will help to keep the peso strong. (Mexico will have taken in more than $25 billion in foreign investment in even as turbulent a year as this one, though half of that represents Citi’s Banamex purchase.)

Under Fox, Mexico isn,t likely to do anything rash to reboot the economy, although some businessmen are pressing for stimulus spending. Mexico’s most powerful impresario, Carlos Slim of Teléfonos de México, floated a proposal that the government use state pension and workers, housing funds to build low-cost housing and thereby boost domestic demand. But the Fox administration has steadfastly resisted embarking on expansionist schemes. “The cornerstone of our economic program is fiscal discipline,” declares the Finance Ministry’s Martínez Ostos.

Finance Minister Francisco Gil Díaz and central bank governor Guillermo Ortiz are reading from the same manual on how to achieve lower interest rates: Reduce inflation and hit a deficit target of 0.65 percent of GDP by holding down spending. Their aim is “convergence” with the U.S. and Canada, Mexico’s Nafta trading partners: a Maastricht-style harmonization of macroeconomic indicators. “Interest rates are going to play the leading role in convergence,” explains Merrill Lynch Mexico analyst Carlos Peyrelongue.

Governments and Wall Street alike see convergence as the key to setting Mexico off from all other Latin American countries , “decoupling” it in bankerese , and thus attracting more foreign investment. This evolving strategy has already bolstered Mexico’s relative risk premium, which reached a low of 304 basis points over U.S. Treasuries in June before rising to 457 points in September and then dropping back to 351 in late November. That is still a far cry from recent peak levels for Argentina and Brazil of 3,089 and 933 basis points, respectively. Indeed, Mexico has become the destination of choice within Latin America for the flight to quality. “Mexico is a great place to be hunkered down,” says Chip Brown, Latin America economist at Banco Santander Central Hispano.

What the government is doing to reenergize the economy is front-loading spending next year, so that expenditures from Fox’s bare-bones budget proposal are bunched in the first part of the year, according to Treasury officials. The Ministry of Finance predicts incipient recovery by the second half of next year and growth of 1.7 percent for the whole of 2002. Of course, this will depend on the strength and speed of recovery in the U.S. If the Mexican economy does end up sinking further, Mexico City can always tap its $17 billion IMF credit line. “If we see pressures in financial markets, maybe we would use it, but we are still not committed to it,” says a Finance Ministry official.

Nevertheless, at this fall’s IMF, World Bank meetings in Ottawa, Finance Minister Gil Díaz said Mexico was at least talking to the Fund about tapping the contingency line as a precaution. Mexico was worried, however, that doing so would tarnish its reputation by associating the country in investors, minds with the likes of Argentina and Turkey, if they are allowed to also tap conginency lines. Analysts see no great cause for alarm in Mexico’s case. “It’s like money in the bank,” says ABN-Amro Mexico analyst Fernando Losada.

The Fox administration’s continuing economic goals remain to get inflation down to 3 percent by 2003 from the current 5.6 percent, reduce the budget deficit further and eliminate it in the long term, while narrowing the state’s role in the economy.

Fiscal reform is crucial to these efforts, as well as to carrying out Fox’s social programs. His original tax scheme was designed to increase gross government revenues by the equivalent of 2 percent of GDP, or $12 billion, through eliminating exemptions and extending Mexico’s value-added tax to food and medicine. The primary idea was to give the president the fiscal maneuvering room to pump additional funds into infrastructure development and health care and education for Mexico’s legions of poor. But fiscal reform is also intended to reduce Mexico’s dependence on revenues from the state oil company, Petróleos Mexicanos, or Pemex, and ultimately boost productivity, and therefore exports, by providing better educations for ordinary Mexicans. Fresh funds are needed, say Fox’s people, because 85 percent of Mexico’s budget is already committed long term to entitlements, pension funds and public borrowing requirements.

But the tax package has become hugely contentious, in part because its introduction was ineptly managed, as even government insiders now admit. The proposal was floated publicly before Fox took office. That raised the hackles of legislators and gave the opposition time to take aim squarely at its central provision: a 15 percent VAT on food and medicines. They roundly denounced the measure as a tax on the poor. Fox partisans countered that the revenues raised would directly benefit impoverished Mexicans and, moreover, that the government would expand transfer payments to the poor to offset the VAT.

But the president had committed a critical miscalculation. “Fox thought that with his popularity he could go over Congress,” says José Antonio Crespo, a political scientist at the Centro de Investigación y Docencia Económica, a Mexico City university. Ironically, the party that Fox ousted , the PRI , wound up largely shaping his fiscal reforms. In control of 17 out of 31 statehouses, the PRI has demanded that the proposed VAT on food and drugs be replaced by new excise taxes on alcohol, soft drinks, tobacco and telephone services. It also wants a significant share of the revenues raised to go to states and municipalities. From the left, the Partido de la Revolución Democrática is pushing for a tax on capital gains. “Because fiscal reform is so important to Fox politically,” says Barclays Capital chief Latin America economist John Welch, he is willing to “compromise Mexico’s fiscal health” by letting the PRI siphon off some of the VAT revenues to bail out PRI-controlled states that have gotten themselves into financial trouble.

The upshot is that the fiscal reforms that are likely to come out of Congress later this month could be severely compromised. The Fox administration has already acceded to reducing its net revenue goal by half, to about $6 billion. “We are happy with that,” insists the Finance Ministry’s Martínez Ostos. But BSCH analyst Brown describes fiscal reform as “almost a nonevent that won,t transform Mexico from an oil-dependent economy.”

Meantime, the delay in passing fiscal reforms has hurt not only Fox’s image but also Mexico,s. Standard & Poor,s, for instance, has held up a coveted investment-grade rating until the government can demonstrate that it can muster the political mettle to pass the reforms. “We have to analyze whether the fiscal reform gives the government sufficient elements for advancing a program of sustained growth,” says Víctor Herrera, managing director of Standard & Poor’s in Mexico City.

The growth would come from infrastructure improvements and from Pemex’s being able to invest more in increasing production because it wouldn,t have to pay as much in taxes. Moody’s Investors Service has given Mexico its investment-grade imprimatur, and some analysts consider the flap over obtaining an investment grade from S&P beside the point. “If Korea is investment grade, Mexico is investment grade,” declares Barclays Capital’s Welch.

Taking a hint from the clobbering his prematurely unveiled fiscal reforms received, Fox has kept citizens mostly in the dark about his electricity and oil and gas program. But in late October he indicated that he intends to keep the petroleum and power industries basically in government hands while allowing private investors to own up to 100 percent of new electricity generation plants (although their output will have to be sold to the state-owned national power grid). He also wants to promote joint ventures between private companies and Pemex and the Comisión Federal de Electricidad. And he plans to open certain segments of the energy sector to private investment, starting as soon as year-end with natural gas exploration and extraction.

Energy reforms, in any guise, won,t be easy to pull off. Fox’s eventual proposal is sure to meet with resistance from the powerful labor unions in the CFE. Their jobs may be at stake, and they can put forward all the usual arguments for state ownership of strategic industries, which still get a sympathetic hearing in Mexico. Moreover, opening the energy sector to private investment will entail constitutional revisions, and debate isn,t expected to begin until March of next year, when Congress reconvenes after its Christmas,New Year’s recess.

Yet if Fox were to liberalize restrictive energy laws sooner rather than later, it could hasten Mexico,s recovery. “Electricity reform is the single best way to jump-start the economy next year,” says Merrill Lynch,s Peyrelongue. He estimates that it could bring in $4 billion to $5 billion in foreign investment in 2002. Energy reforms are also vital to future growth. Mexico’s energy consumption has grown 5 percent a year for a decade. The World Bank estimates that close to $40 billion of new investment will be needed to meet domestic demand through 2010.

No less important but even further down Fox’s docket are recasting labor laws, reforming the judiciary, renewing Mexico’s languishing privatization drive and providing better security for Mexican citizens and foreigners. (The country had some 245,000 violent crimes last year and 601 reported kidnappings.) Stringent labor rules for permanent payroll employees and security concerns have been scaring away a share of prospective foreign investors.

Fox would fare better at advancing his agenda, many argue, if he would exert some control over his unruly cabinet. In a recent episode, following the September 11 terrorist attacks, Fox’s foreign minister, Jorge Castañeda, declared that Mexico should give unconditional support to the U.S. A few days later Fox’s government minister, Santiago Creel, was appealing to Mexican nationalist sentiment and invoking the country’s constitutional mandate of neutrality, making it clear that Mexico would not, for example, be sending any troops to aide the norteamericanos. “He is a president with too many priorities, and his cabinet members don,t seem to be afraid of him, and that creates confusion,” says John Bailey, a Mexico scholar at Georgetown University. Bailey suggests that Fox needs a chief-of-staff type to impose discipline.

Certainly, Fox’s own management style is decentralized, if not downright relaxed. He gives his ministers and advisers free rein to speak their minds and run their own shops. As in the response to the terrorist attack, this can lead to their contradicting one another in public, raising eyebrows as well as hackles. A bitter turf war is currently being waged between the Government Ministry and the National Security Advisor over the national intelligence agency. “It’s a hub-and-spokes approach to management, and he doesn,t care if the spokes are aligned,” says the Instituto Tecnológico Autónomo’s Estévez.

To be fair, Fox has no role model for his job. Mexico’s politics have undergone a sea change since the ancien régime, represented by the PRI, was booted out and the new order, represented by Fox, voted in. Everything seems new and confusing: All of Mexico is on a learning curve. Such is life on the democratic frontier. Mexico confronts a new reality that Beatriz Paredes, president of the lower house of Congress and a leader of the PRI, has dubbed the end of verticalities. A new dynamic is at work. Nobody falls in line behind an authoritarian leader , or a democratic leader, for that matter. The president and Congress cannot be reelected, so Fox has few instruments for cajoling legislators into line.

To many Mexicans, this new order feels like disorder. Congress is riven by opposition parties constantly contending with one another as they grope to find a role for themselves in this new system, but all eager to flaunt their independence from the president. Even PAN, the president’s own party, has at times been reluctant to support Fox, who is still seen as a newcomer to politics, despite his stint as governor of the state of Guanajuato. Meanwhile, the No. 3 party, the leftist PRD, with barely 12 percent of the seats in Congress, usually adopts a posture of recalcitrant opposition, in spite of being fraught with internal divisions itself.

As for the PRI, which has a 70-year legacy of authoritarian rule, it has become sclerotic in its inertia, critics suggest. The federal bureaucracy, the diplomatic corps and the state energy monopolies are all rife with PRI regulars. Rank-and-file party members continue to dominate unions. Yet the PRI, which still forms the largest legislative bloc in Congress, has lost its traditional center and has seemed to be fragmenting. However, “there is a lot of wiggle room for the former ruling party, and they have used it routinely to scare Fox off a point,” says Estévez. Out of all this chaos, the president is supposed to forge a consensus.

Consummate marketer Fox, whose salesmanship got him where he is, can,t seem to get out a clear message above the din. For instance, the government recently nationalized sugar mills and assumed $3 billion of their debt, sending a mixed signal to the markets. “They are running the mills and have operating losses that will accumulate,” says Rogelio Ramírez de la O, president of Ecanal, an economic consulting firm in Mexico City. Fox has also failed to spell out fully how he plans to use the additional revenues to be raised from his tax reforms.

Some say the easiest way for Fox to convince Mexicans that the world has changed for the better would be to reform politics itself. Political analyst Hope hypothesizes that the key components would be to allow for the reelection of deputies, senators and mayors; set time limits for congressional committees to pass laws on to the floor; and improve relations between the federal and local levels by increasing discretional funding to the state governments. As it is, says one of Fox’s critics, the administration suffers from a “democratic paradox” because, although it was elected legitimately, it has not pursued high-level corruption or jailed any big political fish, as its PRI predecessors did to try to establish their legitimacy. “They have not called for an accounting [of previous regimes], they have not set up a Truth Commission , in order to keep the PRI at bay,” says political scientist Crespo.

Fox’s whole program, says consultant Ramírez de la O, is a “hybrid project.” He is “committed on the issue of fiscal reform, delayed on the issue of energy and postpones the matter of labor reform. Fox has defined change itself as a hybrid, slow and very compromised.” Edgar Soto Velázquez, a civil engineer whose sales of building materials have fallen nearly 40 percent in the past 12 months, has his own complaints. “Fox hasn,t improved public safety; we haven,t seen that he has reduced corruption,” he says. “It would be good to have government be accountable, to make information transparent and to end impunity.”

Soto Velázquez and other voters are growing frustrated with Fox. Like a can of Coke left open too long, his famous charisma appears to have lost its fizz. Nonetheless, surveys indicate that the public is willing to give the president more time to accomplish his momentous mission. The Mexican people seem to recognize that transforming an entrenched political system is a protracted process.

Yet to win a clear majority in Congress’s midterm elections in July 2003, Fox’s PAN would have to get 42 percent of the national vote , maintaining the level Fox garnered in 2000. But recent polls show a drop in the votes intended for PAN, from 40 percent early this year to 33 percent in November. His instincts as a marketer ought to tell Fox that it’s time to seize the moment and show some brand leadership.

Fox populi

Times have certainly changed since Vicente Fox triumphantly took office as the first Mexican president in seven decades not to be from the monolithic Partido Revolucionario Instituctional. Now, with Mexico,s once-buoyant economy struggling and Fox’s promising diplomatic overtures to President George W. Bush on hold following the September 11 terrorist attacks, el presidente has lost some of the aura he acquired as a vigorous and charismatic campaigner holding out a brighter future for all Mexicans under the Partido de Acción Nacional banner.

One year later the rancher and former Coca-Cola de México executive finds himself the beleaguered CEO of a complex and changing country. He is a foil for the opposition parties that control Congress, as well as the outspoken Mexican press, which faults Fox for everything from slips of the tongue to cabinet disputes.

In fact, Fox plays better abroad than at home. In mid-November he returned to Mexico after a successful trip to New York, where he rang the opening bell at the New York Stock Exchange, addressed the United Nations and sought to repair Mexico’s image after the recent assassination of human rights lawyer Digna Ochoa.

In mid-November Fox spoke to Institutional Investor Senior Contributing Editor Lucy Conger in his private offices at Los Pinos, the presidential residence. Seated next to a silver-encrusted saddle, with a computer screen just behind him displaying Mexico,s Infosel financial data service, he discussed his achievements and continuing challenges, notably a sweeping program of energy reforms drawn directly from his campaign platform (story). And Fox took pains to emphasize how Mexico is cooperating with the U.S. “minute by minute and day by day” in fighting terrorism.

Institutional Investor: Since you took office a year ago, Mexico has fallen into recession, and political obstacles block many of your initiatives. What can you do to stimulate the economy and regain political momentum?

Fox: Today we are living new realities. I don,t know of any economy that hasn,t revised its growth projections downward. In Mexico the first thing we,ve done is protect what we have, assuring economic stability and political stability. We succeeded in lowering interest rates from 18 percent to 7 percent, lowering inflation from 9 percent to 5.5 percent , inflation for many years was the great enemy of Mexico. Our currency is strong. It has not devalued, it has appreciated. And Mexico maintains strong international reserves, over $40 billion, and flows of foreign direct investment. In sum, our economy has shown its new strengths, and based on this we have kept things stable. It is painful not to have generated jobs as we wanted. These realities have brought a more demanding citizenry that asks when will there be accelerated development in Mexico. My response would be that everything is in place to return to high rates of growth the moment when the leading economies of the world grow. In the meantime, we are concentrating our efforts on social development and combating poverty, on juridical security and attacking corruption and stimulating education.

Some foreign observers say your administration has responded slowly to many situations and that the cabinet is divided on important issues, such as national security and intelligence. Do you see it as important that you unify your cabinet or send clearer messages?

My point of view is that we work as a team. Each [cabinet member] is working and advancing his or her area. Of course, there are differences of opinion, but there is neither conflict nor rupture.

It’s said that what happened in the days after September 11 is an example of this slowness and of the disputes within the cabinet.

I would like for someone to tell me what other country at 9:00 a.m. was making strong, powerful declarations of support to the government and people of the U.S., a message of solidarity and commitment in the struggle against terrorism. I think that Mexico is a country with a deep commitment in the battle against terrorism, against drug trafficking and now in the struggle against corruption and impunity.

Mexico’s economy depends on the rapid flow of goods and services across the U.S.-Mexican border.

And the U.S. economy, too.

Yes. So what actions are you taking since the September 11 attacks to restore full cross-border truck and other traffic?

We,re doing everything necessary to return to 100 percent, including a 100 percent level of security. We have to advance in security, velocity and attention to the flows that cross the border. We need new crossings, new bridges, new customs offices, more technology and technical teams that allow us to review faster a truck with Mexican vegetables. It is very important for the U.S. and for Mexico that the border be very fluid.

You have an ambitious package of Treasury and tax reforms. Where do they stand at the moment?

Our Treasury reform package had seven proposals, and six have already passed [including stock exchange and financial system reforms]. The fiscal reform remains. We have been in an intense dialogue for several months about the fiscal reform law, and it will be resolved before the close of Congress at the end of December. At this moment I can say that I,m optimistic that there will be [fiscal] reform. But it will be altered from my proposal. So that will be an issue.

You,ve said that under your energy reforms, oil and electricity will remain in the hands of the government but that power generation will be opened to private investment and that you,ll promote joint ventures between the private sector and state oil monopoly Pemex and the Comisión Federal de Electricidad. Is that still the case?

Let me refine that: We are not going to privatize the companies or assets the government holds in oil and electric power generation. We are going to open electric power generation to private investment through service contracts. Global energy firms have participated enthusiastically in this with a lot of success. So investment has not been held up. This year nine electric plants were inaugurated, all [built] with private investment, and they now guarantee an adequate flow of electricity for Mexico through 2005. Surely, with changes we are proposing in the law, it will allow us to continue drawing a lot of investment to electric power generation.

When will your energy reform program actually be launched?

This year. We are discussing it with deputies [in the lower house of Congress] and with senators. We are proposing an initiative that delves deep in this issue. By delving deep, I mean we will configure the whole field of electric power in a very modern way that has to do with power generation, trunk distribution and retail distribution. But I don,t know what Congress will approve. Even so, for next year there are already more than ten electric plants programmed for investment in Mexico under the current rules [which require that all energy be sold to the state-owned grid of the Comisión Federal de Electricidad].

What plans do you have for opening the natural gas industry?

We are going to invite private businesses to participate in natural gas through service contracts. There will be service contracts for exploration and for extraction of natural gas in fields not associated with oil. One big field called Burgos is in northern Mexico, and we share it with Texas. Another is located in the southeast, but for now the work will be in the north, because it’s there that most of the electricity generation plants are being installed, and these are operated with natural gas. We will even be able to export electricity. There is a great opportunity. In two weeks we will be unveiling the opening of multiservice contracts, and we are going to invite all companies and investors to sign these contracts, which will allow them to participate in the natural gas sector this year and next year.

How much investment are you expecting to draw to the energy sector?

In electricity generation and in exploration and extraction of natural gas, we are expecting investment of more than $10 billion next year. That is in addition to the heavy investments that Pemex will make in its operations, which will reach about $10 billion annually. In energy all investments combined will be almost $20 billion per year.

How will Pemex spend this extra money?

The investment is for more exploration , we need to have more confirmed reserves. The investment is also for more value added.

We want to process much more petroleum here in Mexico, have refineries and produce petroleum derivatives. We want Pemex to be a vanguard company. Pemex is the seventh-largest oil company worldwide and is a company of high productivity and efficiency. We want to preserve it as a competitive, global company, and that requires investment and reinvestment.

What is happening with your labor reform proposal?

A broad dialogue has been taking place all year with all the relevant sectors. Businessmen, unions and government meet monthly, and we are making progress in reaching a formal proposal for labor reform next year.

You,ve had your run-ins with Congress, and some observers say your administration needs to set up more of a political operation, for instance, hiring lobbyists to work with your opposition in Congress to get bills passed. How do you intend to improve your relations with Congress and the opposition PRI?

So far this year there have been 250 meetings of cabinet ministers or agency chiefs with the respective congressional committees. So there is a very intense communication every day in this area, which has allowed for there to be consensus. People can, though, question the speed with which an agreement is reached. I think that after a change of 71 years, it has been at a good speed. The PRI is today the opposition after 71 years in government, and it has been difficult for the party to adapt to its new situation. However, there is no talk of ruptures or conflicts.

What about your relationship with your own party, PAN, which has not always been a harmonious one?

Well, for the first time ever, we are the government. Certainly, we have had a process of learning and experimentation, but today I can affirm that the relationship between PAN and the government is as close as it could be. We are totally united and in agreement. So with a lot of political dialogue, [dissension within PAN] is totally overcome. With all of this, I think that there has been a great political progress in Mexico. Very important political results have been achieved in only 11 months of government.