In Mexico, legislators have put the role of some regulatory agencies under scrutiny, with a view to reduce public expenditure. The regulator, the IFT, has been one of the targets, with proposals to merge it with other regulatory bodies or even bring its functions back within government.
The constitutional reform of 2013 aligned Mexico’s telecoms regulatory framework significantly closer with that of developed markets – Europe in particular. The IFT was given powers to identify dominant companies and impose ex-ante regulation and the results speak for themselves.
The Mexican telecoms market has grown, retail prices have fallen and investment has increased. But there’s still work to be done – tackling the continued dominance of America Movil being one such priority. To be effective in its endeavours, the IFT needs to be able to continue down the path it has set, and with its independence intact.
Mexico’s President is questioning the role of the regulator, and putting its future independence at risk
In Mexico, legislators have recently sought to reduce public expenditure and create efficiencies within government institutions. In June 2020, the National Regeneration Movement (Morena) proposed to merge the country’s competition authority, the energy regulator, and the telecoms regulator – the Federal Institute of Telecommunications (IFT), to save about 20% on the annual budget of the three authorities. While that specific proposal was abandoned, the debate around the role and functioning of government agencies has continued. The President has complained of the ‘excesses’ that occurred in the creation of ‘unnecessary’ and ‘very expensive’ entities which have ‘no social function’. On 7 January 2021, he pledged to present a reform of the administration by 15 February 2021, and suggested that the functions of the IFT could be incorporated into the Secretariat of Transport and Communications (SCT) within the Government. The announcement immediately prompted the IFT to defend its independence, arguing that it is in the interest of the Mexican people to have a functioning independent regulator.
Despite being dismissive of the role of the IFT and other agencies, lawmakers will likely have to maintain a framework based on an independent regulatory function due to the requirements of international trade agreements (the T-MEC agreement between Mexico, US, and Canada in particular). The reform the President will propose could look to merge different regulators into one – like the CNMC in Spain, something which has already been touted. There are a number of countries with regulators whose competence spans across multiple sectors (e.g. BNetzA in Germany, the ACM in the Netherlands), although many others retain sector-specific authorities (e.g. Ofcom in the UK, ARCEP in France, AGCOM in Italy). Experience from these countries does not clearly indicate whether a multi-sector regulator is better placed to exercise its functions. What’s clear is that regardless of which model is chosen, it will be important to ensure the regulator is adequately funded and staffed, and that it retains the necessary technical expertise to deal with present and future challenges of a still rapidly developing sector.
The regulatory reform of 2013 has yielded positive results
Beforel 2013, the regulatory framework for the telecoms sector in Mexico was far from considered international best practice in many respects. There was partial overlap between the functions of the SCT and the Comision Federal de las Telecomunicaciones (Cofetel), and due to the dependence of Cofetel from the SCT, the former was in practice part of the government and had little more than merely consultative powers in several areas of activity. Legal challenges would often suspend regulatory decisions, providing an incentive for operators to engage in frequent litigation. Such a confusing framework was governing a very concentrated market both in fixed and mobile. In 2013, Telmex/Telcel (the incumbent) had market shares in excess of 70% in fixed telephony and broadband, and of 69% and 82% in mobile telephony and broadband, respectively. Mobile penetration stood around 87%, which was considerably lower than other developing markets in Latin America, despite the significant potential for growth of the Mexican market. The lack of competition was such that mobile number portability would generally benefit Telcel, rather than helping consumers switch to alternative providers.
In 2012, An OECD review of Mexico’s regulatory framework for telecoms highlighted many of these issues and made sweeping recommendations for reform. The constitutional reform of 2013 took on board the vast majority of these recommendations. The newly founded IFT was given real independence from the government in both decision making and its budget, and finally had the instruments to impose ex-ante regulation on dominant companies (“preponderant economic agents”). The regulator finally had the tools to make the market more competitive. The IFT declared the whole America Movil (AM) group, including Telmex and Telcel, to be the preponderant agent in the whole telecoms sector, and imposed a broad range of remedies on its companies. For the first time, Telmex was subject to wholesale broadband access obligations on both copper and fibre – something that is very common in developed markets. In mobile, the IFT was able to introduce asymmetric termination charges to mitigate the imbalance in traffic between Telcel and the other mobile operators.
Since 2013, the Mexican telecoms market has made real progress in terms of competition and growth. The penetration of fixed and mobile broadband has increased, and prices of telecoms services have fallen sharply in real terms (the IFT reported a decrease in telecoms prices of 27.3% between 2013 and 2020, while inflation in the same period was 30.9%). The sector has also seen a rise in investment, and its contribution to the country’s GDP doubled between 2013 and 2020 (from 1.6% to 3.2%). New players (especially Megacable and AT&T) have been able to make inroads in both fixed and mobile markets, and gain market shares.
Mexico needs its independent regulator if it is to build on the progress of the last seven years
Despite these positive developments, the IFT’s job is not yet done and there is still ample room for more competition in the market. AM’s dominance is still evident, particularly in mobile (71% market share in mobile telephony, and 63% in mobile broadband). As an independent regulator, the IFT has the necessary freedom and flexibility to adjust regulation as market conditions change, and can provide the industry with a stable and predictable framework, not subject to the will of individual governments. It still needs to build on the competitive dynamics it has set in motion, many of which have not yet played out in full.
Wholesale access remedies such as LLU have not been widely taken up by alternative operators – the last review of the remedies imposed on the AM group showed that only 23.8k unbundling requests were made between in the least three years, in a market with 19.4m lines. The success of its mandated functional separation of companies in the AM group, which bears some similarity to the legal separation of Openreach from BT in the UK, is also too soon to judge (the implementation phase took almost three years). In mobile, it will be important to go beyond addressing the interconnection imbalances. In the long term, the IFT should look to bring back symmetrical termination rates, as has happened in markets where competition has developed. Other barriers to effective competition also need to be addressed. In particular, spectrum costs are especially burdensome for AM’s competitors. The IFT estimates that they represent less than 5% of Telcel’s annual revenues, whereas they make up about 13% of AT&T’s and 16% of Telefonica’s. A large proportion of this cost is due to the annual fees, which are set by the Ministry of Finance. While the IFT does not have the power to decide on these fees, it is understood that the regulator has recommended the government to lower them to make more room for operators’ investment – testament to the role that an independent regulator can play in mediating between industry and government.
