PROMOTING COMPETITION IN LOCAL MARKETS IN MEXICO A Subnational Application of the World Bank Group’s Markets and Competition Policy Assessment Tool PROMOTING COMPETITION IN LOCAL MARKETS IN MEXICO A Subnational Application of the World Bank Group’s Markets and Competition Policy Assessment Tool © 2018 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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List of Abbreviations COFECE Federal Economic Competition Commission (Comisión Federal de Competencia Economica) COFEMER Federal Commission of Better Regulation (Comisión Federal de Mejora Regulatoria) CONAMER National Commission of Better Regulation (Comisión Nacional de Mejora Regulatoria) FDI Foreign Direct Investment FIDEPAR Trust for the Development of Industrial Parks and Zones in the State of Mexico (Fideicomiso para el Desarrollo de Parques y Zonas Industriales) GDP Gross Domestic Product INDECOPI National Institute for the Defense of Competition and the Protection of Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual) INEGI National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía) LAC Latin American and the Caribbean MTI Macroeconomics, Trade and Investment MCPAT Markets and Competition Policy Assessment Tool SOE State-Owned Enterprise TFP Total Factor Productivity WBG World Bank Group Contents I. Context and development objective 8 II. The role of local competition in economic development 16 III. Applying the MCPAT to subnational governments in Mexico 20 The MCPAT methodology 21 Priority sectors for the subnational MCPAT analysis in Mexico 23 V. Identifying regulatory barriers to competition at the subnational level 28 1. Rules that reinforce dominance or limit market entry 32 1.1. Rules that create monopolistic rights or impose absolute barriers to entry 34 1.2. Rules that create a relative barrier to entry or inhibit the expansion of activities 34 1.3. Rules that allow incumbents to influence decisions as to which firms can enter the market 36 1.4. Rules that create excessively burdensome licensing and registration requirements 36 2. Rules that are conducive to collusion or that increase the cost of competing in the market 38 2.1. Rules that enable agreements among competitors 38 2.2. Rules that restrict the variety of products and services available to consumers 39 2.3. Rules that establish price controls 40 3. Rules that discriminate between firms and protect vested interests 40 3.1. The discriminatory application of rules or standards 41 3.2. The discretionary application of rules or standards 42 3.3. Lack of competitive neutrality vis-à-vis government entities 43 3.4. State aid or incentives that distort the level playing field 43 VI. Priority reforms and their potential effects 46 Retail reform in Oaxaca de Juárez 48 Key economic features of the retail market 48 Retail segments regulated by subnational authorities 49 Reforms in Oaxaca and their effect 50 Trucking services reform in Tabasco 51 Key economic features of the cargo-transportation market 52 The power of subnational authorities to regulate trucking 52 Reform scenarios in Tabasco and their effect 54 VI. Conclusion 58 Bibliography 61 Annexes Annex I – Details on institutional mandates for regulatory reform 66 Annex II – Regulatory restrictiveness in Oaxaca, Tabasco, and Mexico State 67 Annex III - Action plan for reforming cargo transportation in Tabasco State 69 List of Figures, Boxes, and Tables Figure 1. IMCO Subnational Competitiveness Indicator (2014) 11 Figure 2. Number of supermarket chains in municipalities with more-restrictive regulation 12 Figure 3. Number of supermarket chains in municipalities with less-restrictive regulation 12 Figure 4. The number of regulatory restrictions identified in key sectors 12 Figure 5. The sectors prioritized for analysis under Justicia Cotidiana 13 Figure 6. Subnational application of the MCPAT 22 Figure 7. The hierarchy of Mexican legal instruments 23 Figure 8. Sector-selection criterion: administrative jurisdiction 24 Figure 9. Sector-selection criterion: regulatory nature and impact 26 Figure 10. Economic output in Michoacán by sector 27 Figure 11. Standard questions to identify regulations potentially harmful to competition 30 Figure 12. A typology of regulations based on their market effects 31 Figure 13. The number of regulatory restrictions identified in key sectors 32 Figure 14. The number of rules that reinforce market dominance or limit entry 32 Figure 15. The number of rules that facilitate collusion or increase the costs of competing in the market 32 Figure 16. The number of rules that discriminate and protect vested interests 32 Figure 17. The average growth rate of the number of firms and number of regulatory barriers identified 33 Figure 18. The average firm-level net sales growth rate and the number of regulatory barriers identified 33 Figure 19. Changes in retail sales after easing restrictions on opening hours 49 Figure 20: Overview of the Trucking Industry in Tabasco 53 Figure 21: A proposed action plan for pro-competition reform in the cargo-transportation sector 57 Box 1. The institutional authority of COFECE and CONAMER 14 Box 2. The regulatory checklist developed and applied by CONAMER as part of Justicia Cotidiana 15 Box 3. Subnational regulation in unitary governments: A case study from Peru 25 Box 5. The Effect of Opening-Hour Restrictions on Retail Sector Performance 51 Box 6. The pro-competition reforms in Mexico’s national trucking sector 56 Table 1. Regulatory barriers to competition in Peru 18 Table 2. The regulatory mandates of state and municipal authorities in Mexico 24 Table 3: Selected priority reforms for Oaxaca, Mexico State, and Tabasco 48 Acknowledgements This report was prepared at the request of the Government of Mexico and in collaboration with the National Commission for Better Regulation (Comisión Nacional de Mejora Regulatoria, CONAMER). The report was developed by a World Bank Group team led by Tanja Goodwin (Senior Economist, MTI) and including Lucía Villarán (Competition Specialist, MTI), Martha Martínez Licetti (Lead Economist and Global Lead, Markets and Competition Policy, MTI), and Soulange Gramegna (Competition Analyst, MTI) under the guidance of Pablo Saavedra (Country Director, LCC1C), Stefano Curto (Acting Practice Manager, MTI), and Paloma Anós Casero, (Director, MTI). The main authors of the report, Tanja Goodwin, Martha Licetti and Lucía Villarán, wish to thank the Government of Mexico for their valuable input and feedback throughout the process, with particular thanks to Mario Emilio Gutiérrez Caballero, National Commissioner of CONAMER, and José Daniel Jiménez Ibañez, General Director of Special Projects at CONAMER, along with their team, especially Francisco Miguel Parra Ibarra, Misael Aguilar Granados and Francisco Javier Madrigal González. The authors would also like to express their gratitude to Erik Eduardo Munive Moreno, José Carlos Sandoval Loza, Juan Carlos Ponce Patrón, María Eugenia Vergara Robredo, Paola Cristina Gómez Coronado, Patricia Martínez Cano, Stephanie Sánchez Tlacuahuac, Stephany Díaz de la Vega Cervantes and Yania Ortíz Vega. Sean Lothrop provided outstanding editorial assistance. The report builds on several successive projects and activities that have applied the Markets and Competition Policy Assessment Tool (MCPAT) to different subnational governments in Mexico. The pilot was designed and implemented by a team led by Martha Martínez Licetti, which included Tania Begazo and Lucía Villarán, under the guidance of Eva Gutierrez and Marialisa Motta. The team is particularly grateful to Marialisa Motta for her notable leadership, vision and continuous guidance on technical and strategic aspects of this and subsequent projects and engagements in Mexico. Subsequent applications were initially led by John Anderson and supported by Pamela Sittenfeld, Alejandro Falla, Delia Rodrigo and Hillary Jennings, among others. Gabriela Grinsteins provided outstanding legal advice throughout the projects. For their collaboration and support, the team is particularly grateful to the Municipality of Oaxaca de Juárez, the State of Oaxaca, the State of Mexico and the State of Tabasco and the team greatly appreciates all the insight and feedback offered by their staff during the time of the advisory projects. In the course of these projects, the team held valuable technical discussions with the Federal Economic Competition Commission (Comisión Federal de Competencia Económica). This report benefited greatly from comments and advice provided by Tania Begazo (Senior Economist, MTI), Alejandro Espinosa-Wang (Senior Private Sector Specialist, FCI), Roberto Galang (Senior Private Sector Specialist, MTI), Jasmin Chakeri (Program Leader), and many others. The authors are further thankful for the support provided by the Facility for Investment Climate Advisory Services (FIAS) and the UK Department for International Development (DFID) to the development of the MCPAT, and in particular for the continuous fruitful discussions with Miguel Laric, Roger Nellist, Tim Green and Tom Ratsakatika. Vice-president: Jorge Familiar Country Director: Pablo Saavedra Senior Director: Felipe Jaramillo Directors: Paloma Anós Casero Practice Managers: Stefano Curto Task Team Leaders: Tanja Goodwin MEXICO 8 Subnational MCPAT Application Context and development objective 1 O ver the past several decades, stagnant and the sector level. Simulations suggest that a realistic productivity growth rates and large increase in competition could add between 3.4 and 7 disparities in productivity across states percentage points to annual productivity growth among have inhibited the growth of the Mexican economy countries in Latin America and the Caribbean (LAC).5 and contributed to regional divergence. Total factor productivity (TFP) has remained broadly unchanged Mexico’s federal government has created a solid since 1991, as moderate TFP growth in the 1990s and overall competition policy framework. Mexico’s 2010s was wiped out by a sharp contraction in the Federal Economic Competition Commission (Comisión 2000s. Had productivity continued to grow at the Federal de Competencia Económica, COFECE) enforces average rate observed between 1950 and 1970, Mexico’s competition law. Global Competition Review, a GDP per capita would be more than twice its current leading antitrust journal, rates COFECE as on par with level. These aggregate statistics mask vast regional competition agencies in Chile, Israel, and New Zealand,6 differences in productivity growth, as northern states and COFECE has been recognized internationally for its have consistently outperformed southern states. Had success in promoting pro-competition reforms.7 Since the labor productivity of the worst-performing states 2013, the far-reaching agenda of the Pact for Mexico increased at the same rate as the top performers, their (Pacto por México) set in motion constitutional changes current GDP per capita would be 81 percent higher.1 that have overhauled the regulatory framework for the telecommunications sector to boost competition and Competition drives productivity growth. Competition opened the energy sector to private investment, among both promotes the reallocation of land, labor, and capital other key reforms. toward more efficient firms and encourages all firms to adopt more efficient technologies and business However, competition in local markets remains processes. Theoretical and empirical studies show weak, which undermines economic efficiency and that product market competition boosts innovation,2 adversely affects consumers, smaller firms, and productivity,3 and economic growth.4 Moreover, World entrepreneurs. A 2012 World Bank Group (WBG) report Bank studies from Tunisia, Argentina, Russia, Turkey, highlighted the constraints on competition imposed Brazil, and China show that an increase in competition is by state and municipal regulations.8 For example, associated with an increase in productivity at both the firm subnational regulations9 on the production of corn flour Subnational MCPAT Application 1 World Bank (forthcoming). 2 Bassanini and Ernst (2002); Bloom, Draca, and Von Reenen (2011). 3 Aghion and Griffith (2005); Acemoglu et al. (2007). 4 Buccirossi et al. (2009); Voigt (2009). See also: Kitzmuller and Martinez Licetti (2012). 5 Martínez Licetti et al. (2018). 6 In 2014, Global Competition Review awarded COFECE 3 out of 5 stars. 7 For example, the Global Advocacy Contest, jointly hosted by World Bank Group and the International Competition Network, recognized COFECE’s achievements. MEXICO 8 World Bank (2013). 9 “Subnational government” refers to all state and municipal authorities. For further details, see: Herrera Gutierrez (2015). 9 and tortillas, retail fuel sales, retail commerce, and the collecting information on state laws that contain licensing of overland passenger transportation services anticompetitive provisions. In 2016, it published a often restrict the entry of new firms, facilitate cartel comprehensive compendium of anticompetitive behavior, or discriminate against certain groups of firms. legislation in key sectors,11 and it publicly called on In many municipalities, regulations and government subnational governments to take corrective action.12 interventions impose minimum distances between Meanwhile, the National Commission for Better outlets, enable incumbents to coordinate prices and Regulation (Comisión Nacional de Mejora Regulatoria, deny entry to new firms, or grant incumbents exclusive CONAMER [formerly COFEMER]13) has continuously rights that protect their dominant position. Major advanced the regulatory-improvement agenda at the obstacles to interstate trade, local monopoly rights, and subnational level based on simplifying, expediting, and even regulated price-fixing schemes inhibit the entry of otherwise improving generally applicable procedures. new firms, prevent smaller firms from expanding, and CONAMER has successfully promoted numerous reforms artificially inflate consumer prices. via an extensive interinstitutional network at the state and municipal levels, backed by a clear strategy for Regulatory barriers to competition stifle local communicating the economic burden imposed by economic development. Subnational regulations on red tape. However, prior to the joint project with the transportation, agriculture, tourism, retail, and other WBG described below, neither COFECE nor CONAMER sectors are slowing the growth of local economies had pursued a direct effort to remove sector-specific and subverting the power of competitive incentives to regulatory barriers at the subnational level. reduce consumer prices. Anticompetitive regulations for professionals, such as notaries, further increase the The Government of Mexico requested assistance from cost of doing business. Subnational regulations on the WBG in addressing sector-specific regulatory barriers rights of way can also adversely affect the deployment at the subnational level through a pilot intervention of network services by inflating the costs of network focused on promoting pro-competition reforms under and coverage expansion, especially among mobile the framework of the presidential program of Justicia operations. Cotidiana. Both COFECE and CONAMER have developed effective tools for implementing competition policy Lack of competition damages Mexico’s overall and regulatory-improvement policy, respectively, economic performance and exacerbates inequality. and the WBG was able to leverage their expertise to The absence of vigorous market competition costs the ensure that reforms at the subnational level targeted Mexican economy an estimated 1 percentage point administrative barriers to market entry and regulations of GDP growth each year, and this finding has been that severely distorted competition. An analysis of repeatedly confirmed for over a decade.10 Moreover, this major regulatory obstacles provided the foundation for negatively affect the country’s poorest households by an a dialogue between the WBG and state and municipal estimated 20 percent more than its richest households. governments, which yielded an actionable reform plan designed to increase competition in key local markets. The authorities continue to promote competition and regulatory improvement, but many deficiencies Addressing the complex web of regulatory Subnational MCPAT Application have yet to be addressed. In 2013, COFECE began barriers to competition at the local level requires 10 In 2006, the Mexican central bank estimated that imperfect competition shaved 1 percentage point off the annual GDP growth rate. See: The New York Times (2006). Chiquiar & Ramos-Francia (2009) reached a similar conclusion, as did a 2015 OECD Economic Survey regarding the potential impact of the pro-competition measures included in the 2012 Pacto por México. 11 COFECE (2016a). 12 See: COFECE (2016b); Valadez (2016); Solis (2014). 13 According to the General Law on Regulatory Improvement, approved in May 2018, and its 10th transitory provision, the former Comisión MEXICO Federal de Mejora Regulatoria (COFEMER) will now be known as the Comisión Nacional de Mejora Regulatoria (CONAMER), and all previous references to COFEMER shall now refer to CONAMER. 10 a systematic approach. Individually, each barrier is In the reform effort’s initial phase, regulatory limited in its scope, but together they impose a crippling barriers to competition in Oaxaca State and its burden on new market entrants or firms attempting to capital were identified in the priority areas of retail, challenge the power of incumbents. The diffusion of transportation, and public procurement. Oaxaca regulatory barriers across legal instruments, sectors is the third-poorest state in Mexico and ranks at the and jurisdictions complicates efforts to streamline or bottom of the Subnational Competitiveness Index eliminate them. Moreover, the harm caused by each published by the Mexican Institute for Competitiveness regulatory provision depends on how it is implemented (Instituto Mexicano para la Competitividad, IMCO) (Figure and what the features of the affected market are. In 1). In applying the MCPAT, the WBG accounted for addition, some regulatory barriers may be fiercely the specific development challenges facing Oaxaca, defended by local vested interests. including low rates of private-sector job creation. The selection of priority sectors and the design of proposed Given these challenges, the WBG tailored its Markets reforms reflected the potential for increased competition and Competition Policy Assessment Tool (MCPAT) to to generate positive spillover effects in other sectors. the unique circumstances of Mexico’s subnational For example, the WBG supported the Municipality of governments. The MCPAT allows policymakers to Oaxaca de Juárez in an effort to reform regulations for systematically identify, prioritize, and address regulatory retail establishments, especially rules for business hours, barriers to competition according to their potential which were preventing certain types of businesses from to cause harm and the feasibility of reform. This report operating successfully in Oaxaca. Following the reform, discusses the main findings from the WBG’s application the largest chain of convenience stores immediately of the MCPAT across various subnational governments extended its business hours, and another retail chain in Mexico, as well as the initial experience of the reform with a nationwide presence and an innovative business process, by drawing on the results of analytical work and model announced that it would open 24 new outlets implementation-support projects undertaken since 2012. in Oaxaca. Overall, the reform is associated with an The analysis and reform effort described in this report estimated 6.8 percentage-point increase in the growth ultimately covered all of Mexico’s 32 federative entities.14 rate of annual retail sales.15 Figure 1. IMCO Subnational Competitiveness Indicator (2014) 35 32 30 28 25 22 20 15 10 Subnational MCPAT Application 5 0 ih t de ntes cho s aul a Sin án Oa ro Ver cán alif s Tla nia Du elos Mé go San Hid ico Lui algo P as a C ana a orn oo pec r Yuc he Jal a Coa isco Son ila o Ag evo a Ciu uasc León o Tab uz Baj acat co Mo ala N to C a ana sí Qu ora Ch ayari Cam ia Su Mi hiapa a C eca Tam uahu Baj uint uebl alo Nu Colim xac tar xic Gu Poto e jua ip as acr hu at alif R ran x xc err or a Mé r eré dad alie Gu s Z Q Source: IMCO Ranking. MEXICO 14 The 32 federative entities (entidades federativas) include Mexico’s 31 states and Mexico City. 15 Licetti and Dauda (forthcoming). 11 Figure 2. Number of supermarket chains in Figure 3. Number of supermarket chains in municipalities with more-restrictive regulation municipalities with less-restrictive regulation 1800000 1800000 1600000 1600000 1400000 1400000 1200000 1200000 Population Population 1000000 1000000 800000 800000 600000 600000 400000 400000 200000 200000 0 0 1 2 3 4 5 1 2 3 4 5 Number of competitors Number of competitors Note: The green dots reflect individual observations (per municipality) and the blue dots reflect the median value of population figures among all municipalities with the respective number of competitors. Source: (Licetti, Goodwin, & Villarán, Combatiendo regulaciones que restringen la competencia a nivel sub-nacional: Estado de Tabasco, México, 2016 b). In the second phase of the reform effort, the MCPAT’s Figure 4. The number of regulatory restrictions subnational application was replicated in Mexico identi ed in key sectors State and Tabasco. Based on the results achieved in Oaxaca, the governments of Mexico State and Tabasco requested that the MCPAT be applied to their respective legal and regulatory frameworks. Mexico State requested this analysis as part of a comprehensive review of its regulatory framework designed to attract greater investment, and the MCPAT analysis prioritized retail, transportation, and industrial parks. In Tabasco, the Secretary of Economic Development linked the analysis to a larger strategy to diversify the state economy and improve the poor performance of its transportation sector. A strategic partnership between the WBG and Source: CONAMER, MCPAT application under Justicia Cotidiana. Note: These are lower-bound figures based on the available information; the actual number of regulatory barriers to competition CONAMER was fundamental to the success of may be significantly higher. Darker shades of blue reflect a higher number of regulatory restrictions. the policy dialogue with the state and municipal authorities. This partnership enabled the WBG and CONAMER to work closely with the Mexico assessment revealed that towns in Mexico State that Subnational MCPAT Application State government to eliminate the Regional Impact aggressively applied the DIR had fewer supermarket Judgement (Dictamen de Impacto Regional, DIR), a chains per inhabitant, which reduced competition critical regulatory barrier to the establishment of intensity and consumer choice (Figure 2 and Figure 3). new businesses. All private-sector representatives The reform replaced the DIR with a simplified approval interviewed in Mexico State identified the DIR—and its process to ensure that new establishments adhered to susceptibility to discretionary application—as a major the necessary technical standards. The decree and its concern and reported that in some cases it had delayed bylaws aim to improve regulatory predictability and MEXICO market entry or expansion by as much as two years. The reduce the scope for discretionary application. 12 Figure 5. The sectors prioritized for analysis under Justicia Cotidiana 25 Zacatecas Yucatán Veracruz 20 Tamaulipas Tabasco Sonora Zacatecas Yucatán Querétaro Veracruz Tlaxcala Oaxaca Tlaxcala Tamaulipas 15 Nuevo León Tabasco Sonora Nayarit Sinaloa San Luis Potosí Morelos Quintana Roo Puebla Michoacán Querétaro Nuevo León Yucatán México Oaxaca Morelos Tlaxcala 10 Jalisco Nuevo León Michoacán Sonora Hidalgo Morelos México Sinaloa Veracruz Guerrero México Jalisco Quintana Roo Sinaloa Durango Hidalgo Hidalgo Nayarit San Luis Potosí Colima Guerrero Guerrero Jalisco Quintana Roo 5 Coahuila Durango Guanajuato Guanajuato Querétaro Ciudad de México Coahuila Durango Colima Guanajuato Chihuahua Chihuahua Chihuahua Coahuila Ciudad de México Tamaulipas Campeche Chiapas Baja California Sur Ciudad de México Chiapas San Luis Potosí Baja California Sur Campeche Baja California Chiapas Baja California Sur Nayarit 0 Aguascalientes Aguascalientes Aguascalientes Campeche Baja California Michoacán Oaxaca Baja California Retail Construction Manufacturing Hotels and Transportation Agriculture Real Estate Tourism Industries Restaurants Source: CONAMER, MCPAT application under Justicia Cotidiana. In the third phase of the reform effort, the MCPAT manufacturing sectors and less likely to prioritize the was embedded in a program under the Everyday agriculture, real estate, and tourism sectors (Figure 5). Justice (Justicia Cotidiana) presidential initiative, which encompasses all 32 federative entities. The integration of the MCPAT analysis into Building on the close coordination between CONAMER Justicia Cotidiana marks a major shift in Mexico’s and the WBG in Mexico State and Tabasco, a presidential competition policy and regulatory-improvement decree16 officially adopted the MCPAT methodology as agenda. For the first time, a regulatory-improvement part of CONAMER’s subnational regulatory-improvement program in Mexico was designed and targeted at the agenda that was rolled out under Justicia Cotidiana. effect of reforms on market and competition dynamics. All 32 federative entities were required to conduct The process engaged subnational public officials an assessment designed to identify and eliminate and private-sector representatives at the local level subnational regulatory barriers to competition in key in a discussion of competition policy principles and sectors, with the WBG as a strategic partner. impact of regulations on market contestability. It also revealed unexploited synergies between COFECE and The results highlighted the proliferation of CONAMER to leverage their technical capacity to address anticompetitive regulations at the state level. As anticompetitive regulation. COFECE has now developed of June 2018, CONAMER had completed the MCPAT several subnational advocacy initiatives focused on Subnational MCPAT Application analysis in all 32 federative entities, identifying a total removing barriers to competition, and it has increased of 2,417 anticompetitive restrictions. The analysis the number of antitrust investigations in local markets. found numerous regulatory barriers to competition in The two authorities are uniquely positioned to assess and each state, as well as disparities between states in the remove potential barriers to competition (Box 1). Mexico number of anticompetitive regulation (Figure 4). When is now the first country in Latin America to implement a applying the MCPAT methodology, states were most comprehensive subnational regulatory reform program likely to prioritize the commerce, construction, and focused on eliminating barriers to competition. MEXICO 16 Goverment of Mexico (2015). 13 Box 1 The institutional authority of COFECE and CONAMER COFECE and CONAMER have complementary mandates. COFECE is charged with protecting and promoting competition, while CONAMER’s primary mandate is to improve the quality of regulation. As poorly designed regulations can inhibit competition, the two institutions have closely aligned objectives, and each can leverage its distinct advantages to address anticompetitive regulations. COFECE can open administrative proceedings to investigate and officially recommend reforming anticompetitive regulations. It can also use advocacy tools to highlight the negative impact of regulatory barriers on competition and recommend modifications. Moreover, COFECE can investigate and sanction firms and individuals engaging in anticompetitive practices that may be facilitated by restrictive regulations. At the federal level, CONAMER can review regulatory proposals by conducting regulatory impact assessments. These assessments include an analysis of a proposed regulation’s potential impact on competition, which may be informed by COFECE’s technical expertise. At the subnational level, CONAMER has developed a deep interinstitutional coordination mechanism with state and municipal authorities to promote better regulation. Under cooperation agreements, CONAMER can advise subnational governments on priority regulatory changes, and it has successfully supported authorities in passing reforms. Annex 1 describes COFECE and CONAMER’s complementary mandates and capabilities in greater detail. In recent years, coordination between the two institutions has increased. CONAMER and COFECE have an institutional cooperation agreement in place to analyze competition effects as part of federal regulatory impact assessments, and CONAMER has created multiple cooperation agreements with subnational governments to improve regulation. CONAMER was also a key counterpart in the initial MCPAT pilot projects in Mexico State and Tabasco. In 2016, COFECE published a compendium of miscellaneous regulatory obstacles to competition at the state level and presented its findings at a National Conference on Regulatory Improvement hosted by CONAMER. Later in the same year, COFECE and CONAMER jointly launched a contest to identify the “most absurd regulatory obstacles,” which prominently featured many subnational regulations. In recent years, building on lessons learned, COFECE has focused on its role as a law-enforcement agency tasked with investigating especially distortive local regulatory barriers to competition (such as monopoly rights for trucking associations), and, often in parallel, the anticompetitive practices associated with those barriers (such as trucking cartel agreements). CONAMER, on the other hand, has integrated markets and competition assessments into its regulatory-improvement programs and advocates for widespread reform at the local level. In the future, CONAMER will further expand its work with subnational authorities. The new General Law on Regulatory Improvement (Ley General de Mejora Regulatoria), signed by President Peña Nieto in May 2018, requires CONAMER to publish guideline for a Reform Program for Priority Sectors (Programa de Reforma a Sectores Prioritarios) within one year (Art. 11.VII). This reform program will institutionalize the work initiated under Justicia Cotidiana, rendering it permanent and sustainable and transforming the MCPAT framework from an individual initiative into an official public policy, similar to longstanding programs such as the System for the Rapid Establishment of Firms (Sistema de Apertura Subnational MCPAT Application Rápida de Empresas), created in 2002. This report provides CONAMER with a systematic Justicia Cotidiana initiative, which includes areas such as summary of the findings of the MCPAT analysis. It “governmental efficiency” and “regulatory quality” (Box 2). supports CONAMER’s overarching strategy for regulatory It can also serve as a guide to institutionalize competition MEXICO improvement, as the MCPAT framework has already analysis in subnational regulatory impact assessments been embedded in a checklist developed for the (RIAs) and in the broader regulatory-improvement 14 Box 2 The regulatory checklist developed and applied by CONAMER as part of Justicia Cotidiana With support from the WBG, CONAMER developed a regulatory checklist to support the implementation of its Reform of Three Priority Sectors (Reforma a Tres Sectores Prioritarios) project in the context of Justicia Cotidiana. The checklist was designed to complement and expand the use of the MCPAT framework, and it includes four additional considerations for regulatory improvement: (i) Facilitating the establishment and operation of firms. In addition to the MCPAT criteria, this component of the checklist verifies whether the legal instruments adequately protect property rights and promote research and development, innovation, and reinvestment by companies. (ii) Governmental efficiency. This component identifies whether the procedures or information requirements mandated in legal instruments are substantiated by a higher-level legal instrument. It also determines whether public administrative procedures are clear and responsive, easy to understand and impose the minimum necessary compliance costs. (iii) Regulatory quality. This component verifies whether a given legal instrument is aligned with the following principles: a) establishment of rights and obligations; b) regulatory coherence; c) risk- based regulations; d) common language; e) clear objectives; f ) clarity on enforcement agencies; and g) easy access to information. (iv) Attraction of investment: This pillar verifies whether a given legal instrument is consistent with attracting investment from non-local agents and aligned with international free-trade agreements. Source: CONAMER’s Checklist Regulatorio. framework. As restrictive regulations are often associated regulations, especially countries with a federal structure with anticompetitive practices, COFECE’s role will in which reform opportunities can be pursued by, or continue to be essential in to directly address collusive in concert with, subnational governments. Efforts to agreements and other anticompetitive conduct. replicate the program described in this report should be tailored to the domestic institutional environment. This report is divided into five sections. Following In Mexico, COFECE has full constitutional autonomy, 287 this introduction, Section 2 discusses the international staff dedicated to competition enforcement,17 and ample experience regarding the role of local competition in powers to enforce laws against anticompetitive practices economic development. Section 3 briefly presents the and barriers to competition. CONAMER has decades MCPAT methodology and its subnational application. of experience working with state- and municipal-level Section 4 describes instances of anticompetitive governments, a network of regulatory-improvement regulation, some of which have been eliminated, and specialists in each jurisdiction, and a reputation for evaluates their harmful effects. Section 5 provides sophisticated engagement with policymakers at examples of how to design and prioritize reforms based every level of government. In addition, CONAMER was on the interactions between subnational government assigned 43 dedicated economists, lawyers, and public Subnational MCPAT Application interventions and the features of local Mexican markets, policy specialists to implement the MCPAT in 32 states. as well as their feasibility and potential impact. While the institutional and policy framework will vary substantially across countries, the MCPAT methodology While the report focuses on Mexico, it also includes allows for flexibility in the scope of its application, valuable lessons from the international experience including via pilot programs, and it includes political- and has practical applications in a wide range of economy and feasibility considerations that can enable countries. This report is designed to help countries it to succeed in a less mature institutional environment. MEXICO around the world identify and address anticompetitive 17 Global Competition Review (2017). 15 The role of local competition in economic development 2 Subnational MCPAT Application MEXICO 16 A cross countries, regulatory barriers to services, wastewater management, and the hospitality competition at the national level have been industry.18 more widely recognized and addressed than have barriers at the local level. International An analysis of subnational regulations in Peru comparative datasets, such as the OECD-WBG Product identified numerous barriers to competition in Market Regulation Indicator, and national regulatory- key sectors. In 2013, 10 of the country’s 21 largest improvement instruments, such as RIAs, analyze municipalities had no procedures in place to authorize and address regulatory restrictions to competition the construction of telecommunications systems, that national governments have established or may limiting firms’ ability to compete in the critical area of establish. Many countries have not yet systematically network expansion. Moreover, 76 percent of complaints assessed the degree to which subnational regulations filed by businesses cited illegal or unreasonable actions restrict competition or otherwise distort local markets. by decentralized governments. The analysis identified While this focus on the national level partly reflects over 1,000 bureaucratic barriers that increased the cost the important role of central governments in setting of doing business, slowed the expansion of key sectors, nationwide norms and standards, evidence from a and many of these barred competitors from entering number of countries reveals that local barriers to a given market or competing on equal terms, with competition pose a serious threat to economic growth adverse direct and indirect effects on the health of local and development. economies (Table 1).19 Competition authorities in many federal and unitary However, recent reforms in Peru have demonstrated governments are beginning to address laws and how to successfully utilize a unique international regulations that are issued and/or implemented enforcement tool to identify and eliminate illegal by local governments tend to reduce competition. or unreasonable barriers to competition.20 Peru’s Based on the submissions to the annual Global Advocacy National Institute for the Defense of Competition Contest, jointly hosted by the WBG and the International and the Protection of Intellectual Property (Instituto Competition Network, competition authorities in at Nacional de Defensa de la Competencia y de la Protección least 10 countries have successfully used advocacy de la Propiedad Intelectual, INDECOPI) includes a special tools to prevent or eliminate barriers to competition division authorized to declare that regulatory norms or Subnational MCPAT Application at the subnational level. Brazil, France, Kenya, Latvia, administrative acts constitute an “illegal or unreasonable Mexico, Panama, Peru, Singapore, Spain, and the United bureaucratic barrier” to market entry. This mandate is Kingdom have engaged with local authorities to design separate from antitrust enforcement. The unit can also pro-competition interventions to in sectors such as taxi nullify the legal effect of regulations or policy actions 18 For further information on the contest and its “winners”, see: http://www.worldbank.org/en/events/2017/11/08/the-2017---2018- competition-advocacy-contest#04, and for a summary of successful advocacy, see: Goodwin & Martinez Licetti (2016). MEXICO 19 Vostroknutova, Rodriguez, Saavedra, & Panzer (2015). 20 The Peruvian government refers to these as “barriers to market assess and permanence.” 17 Table 1 Regulatory barriers to competition in Peru Barrier Direct Effect Competition Effect Indirect Effect Transport Minimum capital Increased cost of Regulatory protection of Poorer service; Higher requirements doing business incumbents prices Telecommunication Excessive restrictions on Less coverage Potential barrier Poorer service; Higher installing antennas to the expansion prices; Less access of more-efficient telecommunications providers Construction/ Various regulatory Less investment; less Potential discrimination Less job creation Infrastructure restrictions and arbitrary employment against more-efficient actions by local authorities infrastructure projects Retail Burdensome requirements Increased cost of Potential discrimination Less job creation to obtain operating doing business against more-efficient permits retail stores with greater growth potential Source: Da Rosa, Licetti, Goodwin, Tan & Jiang (2015), Peru - Tackling regulatory barriers to competition and local economy development, mimeo. initiated by subnational governments, but its mandate In Russia, local governments have also been found does not extend to laws issued by Peru’s Congress. It to directly support anticompetitive practices. Under can impose fines on public officials who do not comply Russian law, “anticompetitive actions” by government with its directives, and it can initiate constitutional action authorities and representatives can be sanctioned. In to expunge regulations it deems a bureaucratic barrier 2017, 98.8 percent of infringements on antimonopoly anticompetitive. Reforms in 2015 and 2016 enabled law, both by firms and public authorities, were associated INDECOPI to: (i) ban regulations nationwide, not merely with anticompetitive actions by regional and local on behalf of the company that filed the complaint; (ii) authorities.22 bar central government authorities from challenging its decisions in court except in very few circumstances, In Colombia, a lack of competitive neutrality and requiring prior approval by the Prime Minister; (iii) rank room for individual discretion in the application of public entities based on their level of compliance with regulations may distort the level playing field. In the elimination of bureaucratic barriers, and (iv) create an various sectors, local state-owned enterprises (SOEs) electronic portal to publish its resolutions and rankings. exercise both regulatory and commercial functions These reforms also updated the criteria for declaring a while competing with private firms. For example, in bureaucratic barrier to be illegal or unreasonable, and, for 2013 the mayor of Bogota and two local SOEs forced the first time, explicitly included a competition criterion. the city’s four private waste-management firms to Subnational MCPAT Application Following these reforms, the number of illegal bureaucratic work as SOE subcontractors. At the same time, the barriers voluntary eliminated by government bodies municipality created a major regulatory obstacle to increased from 46 in 2013 to 1,565 in 2016 and reached market entry by empowering an SOE to authorize 3,050 in 2017. Another 701 barriers were sanctioned or deny access to Bogota’s only sanitary landfill. The and eliminated by government bodies in 2017.21 Colombian Confederation of Chambers of Commerce 21 INDECOPI (2017). MEXICO 22 From a speech given at the April, 2018 Meeting of the State Council on Promoting Competition. A full transcript is available at: http:// en.fas.gov.ru/press-center/news/detail.html?id=52888. 18 (Confederación Colombiana de Cámaras de Comercio or Australia’s GDP.24 In 1995, federal and state authorities Confecámaras) has determined that the implementation agreed to implement a plan to systematically remove of regulations by local public entities (e.g., police regulatory barriers to competition and adopt pro- departments, fire departments, and other municipal competition reforms. To incentivize action at the state agencies) in multiple sectors (e.g., security, occupational level, the federal government increased budgetary safety, data protection, urban development) varies transfers to states that applied competition principles substantially across municipalities and regional when issuing regulations and that adhered to their departments (departamentos), undermining regulatory commitments under the National Competition Policy. predictability, creating room for discriminatory application, and hindering the expansion of smaller firms. Over 90 percent of the most important business licensing, registration, and regulatory procedures are implemented at the subnational level, 83 percent by local governments and 8 percent by departamentos. Effective competition at the local level can also be critical to the success of structural reforms at the national level. In Mexico’s energy sector, the entry of new private firms competing with the national oil and gas company, Mexican Petroleum (Petróleos Mexicanos, PEMEX) may reduce ex-depot gasoline prices. However, subnational regulations often establish minimum distances of more than 1 kilometer between gas stations, reducing the benefit to consumers by granting significant pricing power at the point of sale. In India, restrictive product market regulations at the state level have inhibited productivity growth. A 2010 OECD study of subnational product-market regulation data from 21 Indian states found that states in which the regulatory environment diminishes economic incentives for firms to compete tend to have lower productivity growth rates than do states in which regulation is more conducive to competition.23 States with product market regulatory frameworks that are similar to those of developed economies also attract more foreign investment, have a larger share of formal employment, and provide infrastructure more efficiently. Subnational MCPAT Application Subnational regulatory changes were at the heart of Australia’s National Competition Policy, one of the world’s most comprehensive structural reform initiatives, which added an estimated 2.5 percent to MEXICO 23 Conway & Herd (2009). 24 Productivity Commission (2005). 19 Applying the MCPAT to subnational governments in Mexico 3 Subnational MCPAT Application MEXICO 20 The MCPAT methodology analyzes key features of selected markets, especially those that may tend to shape competition, such as product T he MCPAT is designed to help policymakers homogeneity, natural barriers to entry, economies of develop actionable policy options for using scale and scope, and information asymmetry. It also competition instruments to improve market considers the availability of substitutes and the relative outcomes. Unlike other competition assessments, size and integration of the market in Mexico. Based on the MCPAT both provides a diagnostic assessment this analysis, the report identifies regulatory provisions and can guide the prioritization and adoption of pro- are likely to hinder competition, either by design or competition reforms. The creation of the MCPAT was through application. informed by the WBG’s experience advising over 60 client governments on sector-specific policy reforms How a given regulation is applied largely to promote competition. The MCPAT can be applied to determines how much it restricts competition. For national, subnational, and supranational governments. example, if a government has the legal authority to limit the number of business licenses, then how many The application of the MCPAT at the subnational licenses it decides to issue will determine whether level must reflect the country’s legal and its authority imposes a binding constraint on market constitutional arrangements. In some countries, entry and, if so, how severely it distorts competition. subnational governments have the power to issue Therefore, the MCPAT assesses both the regulatory laws and regulations, and the MCPAT can help identify framework itself and how public officials implement potential reforms in priority sectors. Among more its provisions in practice. heavily centralized governments, where local authorities primarily implement laws and regulations issued The MCPAT’s subnational application provides a at the national level, the MCPAT can both promote step-by-step approach to identify and prioritize pro-competition regulatory reform by the central opportunities for reform. The first step is to narrow government and assist subnational authorities in down the markets or subsectors on which the analysis improving the efficiency and impartiality of regulatory will focus. The MCPAT prioritizes sectors for analysis implementation. In both cases, the MCPAT can help that: (i) are highly relevant to the economy, (ii) present indications of limited competition, and (iii) are subject Subnational MCPAT Application identify which reform opportunities will have the greatest impact at the local level. to government interventions that can influence competition. The prioritization process is conducted Government interventions in the market can be through desk research, interviews with government particularly harmful when they exacerbate inherent regulators and policymakers, interviews with and key market characteristics that tend to limit competition, current and potential market participants, including such as natural barriers to entry. The MCPAT provides firms and business associations, an analysis of available MEXICO guidance on how to prioritize regulatory reforms based statistics and market information, and a review of on the features of the markets they affect. This report relevant laws and regulations. 21 Figure 6. Subnational application of the MCPAT Identify sectors that are under the legal Either States or municipalities have the legal mandate to issue regulation on this economic sector mandate of sub-national authorities Legal mandate over the sector can be shared with Federal government but sub-national authorities have to have the power to 1 Prioritize sectors that are key for the Screening of sectors that are not performing well; Relevant markets for the local economy; development of the local economy Identify sub-segments in each sector E.g.: Homogeneity of the good or service; Natural barriers to entry; Economies of scale Understand the market features and scope; asymmetry of information 2 Identify the speci c market scenarios What are the substitute goods and services available? What is the size of the market? in the subnational markets What is the degree of integration? Identify regulatory barriers Rules that reinforce dominance or limit entry to competition Rules that are conducive to market outcomes or increase costs to compete in the market Rules that discriminate and protect vested interests 3 How rules have been applied in practice? Are performance or economic regulations Assess implementation issues Is the legal framework applicable? implemented in a discriminatory way? Is application restricting the entry of Who are the authorities in charge of certain actors in the market? implementation? Prioritize reforms based on Given the market features and the speci c market scenarios, is the regulation as implemented likelihood of actually a ecting likely to actually be a ecting competition dynamics? (reinforcing dominance or facilitating competition dynamics collusive outcomes) 4 Prioritize reform based Political economy, rank of legal instrument, anti-competitive potential, application of regulations on feasibility/impact (intensity/frequency) Impact on, market performance of local economies, 5 Measure the impact of the reforms competiveness of the State, inter-state trade Source: Author’s elaboration. Once priority sectors have been identified, market wide policies and regulations that affect the functioning dynamics are analyzed in depth to reveal obstacles of sectors being studied; and (iii) market outcomes, to competition. This analysis includes four core which encompass anticompetitive behavior (e.g., abuse Subnational MCPAT Application elements: (i) market features, including market structure, of dominance, cartelization, etc.), market concentration, vertical integration, and direct government participation and market entry, inter alia. in the market; (ii) market scenarios, which examine how general market features of a sector play out in Finally, the MCPAT lays the groundwork for policy the market or state under analysis25; (iii) government recommendations. These recommendations reflect interventions, including any sector-specific or economy- the findings of the analysis, as well as the government’s MEXICO 25 While road transportation may have substitutes in some markets or areas, Tabasco has no navigable waterways, and construction material is transported solely by road. 22 stated policy objectives, and are informed by a review while subnational authorities regulate the use of state of international best practices. The MCPAT also helps or local roads. Subnational authorities may derive their to optimize reform sequencing by estimating the mandate to regulate certain sectors via the delegation economic damage caused by each regulation, their of powers from the federal government through the indirect effects on other economic sectors, and the federal constitution or federal laws, or via specific state feasibility of reforming them (Figure 6). laws or statutes. Priority sectors for the subnational Subnational authorities can use two nonexclusive MCPAT analysis in Mexico methods to affect economic activity, the first of which is to directly regulate a certain aspect or The MCPAT identifies priority sectors for regulatory aspects of a given market. The major elements of reform, not for governmental support. The MCPAT direct or substantive regulation include: (i) establishing prioritization process singles out economic sectors in requirements to enter a given market and provide which competitive distortions are especially damaging services or produce goods, (ii) setting rules for how and where implementing pro-competition reforms firms in a given market must behave, (iii) determining or would be both beneficial and feasible. However, this influencing prices and/or determining access conditions should not be confused with the prioritization of sectors for the services or goods produced in a given market; (iv) to receive public funds, state aid, promotional support, defining how business associations are constituted and or other forms of policy assistance. conditioning their participation in a given market; and (v) and other forms of regulation that affect how a given As in other federal republics, Mexico’s central, state, market operates. and local authorities are all empowered to issue regulations. The power to regulate a given sector may The second method is to regulate other activities be shared among these three levels of government that indirectly affect aspects of the market. (Figure 7). For example, in the transportation sector, the Complementary or indirect regulation obliquely federal government regulates the use of federal roads, influences market conditions without direct government Figure 7. The hierarchy of Mexican legal instruments Federal Constitution √ Federal legislative International level treaties Federal laws √ State Constitution √ State legislative Bandos municipales level Subnational MCPAT Application State Laws √ State Bylaws √ Bylaws √ Municipal legislative level Circulares Administrative Provisions MEXICO Source: CONAMER. Note: Legal instruments with a checkmark were prioritized for the MCPAT analysis. 23 Figure 8. Sector-selection criterion: administrative jurisdiction If the sector exclusively falls within federal jurisdiction The sector will not be analyzed Subnational regulation is cross-cutting/ The sector may be analyzed, complementary (indirect) only if it is of economic importance If the sector falls within federal and subnational jurisdiction or exclusively under subnational jurisdiction. The subnational intervention (regulation) is substantive (direct) The sector is pre-selected for analysis Source: Author’s elaboration. Table 2 The regulatory mandates of state and municipal authorities in Mexico Sector Name State purview Municipal purview Agriculture, animal breeding and production, forestry, fishing and hunting X Mining Electric power generation, transmission and distribution, water and gas supply X through mains to final consumers Construction X X Manufacturing X X Wholesale trade X X Retail trade X X Transportation, postal services and warehousing X Mass media information Financial and insurance services Business support services, waste management and remediation services X X Real estate services, tangible and intangible goods, rental and leasing X X Educational services X Subnational MCPAT Application Health care and social assistance services X Temporary accommodation services and food and beverage preparation services X X Other services, except government activities PPPs X Economic Development X Public Procurement X X MEXICO Source: CONAMER. Note: This industry classification is based on the Sistema de Clasificación Industrial de América del Norte 2013 and includes three cross-cutting segments of the economy: public-private partnerships, economic development and public procurement. 24 Box 3 Subnational regulation in unitary governments: A case study from Peru In unitary governments, economic regulation typically flows from laws passed by the national legislature and statutes issued by line ministries. However, some substantive regulatory matters are delegated to subnational governments, and subnational authorities are frequently tasked with implementing central-government policies. Peru has three levels of government: the national government, 25 regional governments, and more than 1,600 municipal and district governments. The Peruvian legal framework empowers these different levels of the government to issue regulations that affect investment projects in key sectors such as telecommunications, transportation, energy, mining, and retail, which are critical to local economies. While in most cases a national or regional government must authorize the investment project, in every case the actual project permits must be obtained from a local government. In addition, agencies with cross-cutting mandates, such as environmental protection or water management, are required to authorize all investment projects in key infrastructure sectors. Consequently, approval for an investment project must be granted by multiple levels of government. Sector Government level National Regional Local Sanitation Yes No Yes Energy and mining Yes Yes Yes Transportation Yes Yes Yes Telecommunications Yes Yes Yes A WBG assessments of the Peruvian legal framework showed that a lack of coordination and limited technical training of regional and local authorities by the central government hindered the implementation of reforms designed to simplify regulatory processes. The assessment also found that most obstacles to the development of key projects, including delays and illegal and or irrational requirements, were imposed by local authorities, which issued acts or regulations that contradicted national policies and which failed to implement regulatory reform policies at the local level. Even in a unitary government, subnational authorities may have considerable latitude to distort competition in local markets. In these cases, a subnational MCPAT tailored to reflect the role of regional and local authorities in a unitary system can reveal important barriers to competition. intervention. For example, in some cases subnational may be appropriate in some circumstances, Mexico’s governments may issue public safety or environmental most distortive interventions appear to occur through Subnational MCPAT Application policies that do not directly apply to a given market substantive regulation. As the analysis was designed to but that nonetheless affect its competitive dynamics, examine subnational regulation, it focuses exclusively especially when these policies apply differently to on sectors that are subject to direct or at least indirect various competitors in the same market. regulation by either state or municipal authorities (Figure 8 and Table 2). The subnational application of the MCPAT in Mexico focused on assessing substantive regulation. While The subnational MCPAT methodology can be applied MEXICO evaluating indirect or complementary regulation to both federal systems and unitary governments. 25 Figure 9. Sector-selection criterion: regulatory nature and impact Unlikely to have an impact on market It will not be included in the analysis competition dynamics Social regulation Administrative regulation May have an impact on market competition dynamics It will be included in the analysis Economic regulation It will be included in the analysis Source: Author’s elaboration. Even in countries where subnational authorities have showed signs of competitive distortion through a limited legislative and regulatory autonomy, a subnational three-step process. First, sectors were evaluated based MCPAT could identify distortions in local markets caused on their contribution to economic output, productivity, by the uneven implementation of laws and regulations and investment, as well as their contribution to major issued by the central government (Box 3). supply chains, spillover effects on other sectors, share of consumer spending, and impact on poor Direct regulatory interventions are typically households. Second, once economically vital sectors grounded in either economic or social policy had been identified, subsectors were selected based objectives. Economic regulation is often designed to on their relevance to the local economy and the extent cope with market failures—for example, by simulating to which they were under the regulatory purview of competitive outcomes in a natural monopoly. Social subnational authorities. Third, the range of subsectors regulation frequently aims to correct information was narrowed to those that showed preliminary signs of asymmetries between individuals and firms, or to market failures or lack of competition. These subsectors compensate for externalities and spillover effects. In exhibited potential or actual anticompetitive practices, addition, administrative regulation includes procedures possessed economic characteristics that generally and formalities through which governments collect indicate succeptibility to market concentration or information and can intervene in economic decisions. collusion, or presented evidence of significant market While the MCPAT can evaluate both economic, social and deficiencies, such as low levels of productivity, an administrative regulation, some social and administrative insufficient or excessive number of firms, unusually regulations may be omitted from the analysis if they are high prices, and poor product or service quality, inter Subnational MCPAT Application unlikely to significantly impact market competition, alia. such as traffic rules, building codes, or environmental standards (Figure 9). In the State of Michoacán, retail and manufacturing were identified as priority sectors for analysis. Six As noted above, sectors are selected based on their sectors contribute substantially to Michoacán’s total contribution to the local economy and indicators economic output (Figure 10). Over the last five years, of lack of competition. In Mexico, the subnational retail grew by 10 percent—a faster rate than any other MEXICO MCPAT identified economically relevant sectors that sector and well above Mexico’s average retail-sector 26 Figure 10. Economic output in Michoacán by sector that are located in Lazaro Cardenas and that have been inspected by the municipal authorities. Transportation Hotels and and storage restaurants Across Michoacán, the regulation of tortilla 8% 3% production is particularly relevant to local Agricultural industry economies. In Mexico, municipalities have the legal 15% authority to impose rules on the establishment and Retail trade operation of tortilla venders. Tortilla production account Real estate 31% services for a full 14 percent of jobs in the manufacturing 20% sector, including 10 percent of manufacturing jobs in Michoacán. Manufacturing Regulations on tortilla production and sale appear industry to negatively affect competition. A preliminary 23% Source: INEGI. assessment revealed evidence of price-fixing schemes within municipalities and among producer groups. In 2016, the Dough and Tortilla Industry Association growth rate of 6 percent. About 30 percent of workers (Asociación de la Industria de la Masa y la Tortilla) in Lázaro in Michoacán are employed in retail. The manufacturing Cárdenas announced a fixed price for one kilo of tortilla industry is the second-largest contributor to the state’s of 19 Mexican pesos (MXN). This fixed price was MXN economic output at 16 percent, and it employs 12 5.8 higher than the average price in Michoacán and the percent of the state workforce. surrounding states of Colima, Guadalajara, and Nayarit and MXN 6.6 higher than the average for the nearby Among Michoacán’s retail subsectors, supermarkets municipality of Morelia. and grocery stores are both highly relevant to the local economy and subject to direct regulation by state and local authorities. In Mexico, municipalities are empowered to regulate the commercial sale of food. Moreover, grocery stores and supermarkets have particularly levels of high value added, and 7 percent of Michoacán’s workers are employed in this subsector. Regulations in the supermarkets and grocery stores subsector may adversely affect competition and lead to suboptimal market outcomes. Overall, productivity of supermarkets and grocery stores in Michoacán is an estimated 24 percent lower Subnational MCPAT Application than comparable facilities elsewhere in Mexico. Competitors have difficulty entering some markets in the food value chain. For example, the municipalities of Morelia and Lázaro Cárdenas have only one and two slaughterhouses, respectively, and these facilities lack the capacity to satisfy local demand. In Lazaro Cardenas, municipal regulations explicitly prohibit the commercial MEXICO sale of meat that does not come from slaughterhouses 27 Identifying regulatory barriers to competition at the subnational level 4 Subnational MCPAT Application MEXICO 28 I n Mexico, subnational regulations are typically framework and government interventions. Whereas issued through general laws approved by State in unitary governments the scope for interventions Congresses, along with their implementing by subnational authorities is relatively limited, the bylaws. These bylaws provide additional specifications Mexican federal system vests subnational authorities for the regulation of a given sector. Although each state with significant independent powers. Consequently, is constitutionally independent and follows its own subnational authorities in Mexico can intervene in local procedures, the general laws share common features, markets both by issuing regulations and by directly especially with respect to their main provisions. An participation in the market through public enterprises, analysis of potential barriers to competition should state-aid programs, fiscal incentives, and public begin by examining the key provisions of the general procurement. regime, then consider its implementing bylaws or other complementary regulations. A standard set of research The MCPAT classifies regulatory provisions according questions can reveal which laws and bylaws are most to their impact on the market (Figure 12). Regulations likely to adversely affect competition (Figure 11). can affect competition both directly and indirectly. For example, a regulation that directly constitutes a barrier Per the MCPAT methodology, potential regulatory to entry may also indirectly facilitate collusion between barriers to competition can be classified into three incumbent firms. In cases where a regulation may create main groups according to their effects. These three more than one type of competition restriction, the categories are: (i) rules that reinforce market dominance analysis should distinguish between its primary and or limit entry; (ii) rules that are conducive to collusive secondary effects, and prioritize the former. For example, outcomes or increase the costs of competing in the a limit on the number of business licenses may directly market; and (iii) rules that discriminate between firms impeded market entry, and it may indirectly facilitate and protect vested interests. These types of policies collusion by limiting the number of firms operating in include, but are not limited to, restrictions on the the market. In this case, the analysis should focus on the number of firms that can enter the market, regulations primary effect. that control or directly affect market variables such as the price or quantity of goods and services, and regulations While all Mexican states impose restrictive that tend to favor inefficient firms. regulations, the most common type of regulatory Subnational MCPAT Application barrier varies from state to state. As part of the The MCPAT identifies anticompetitive regulations subnational MCPAT, an analysis conducted by CONAMER according to a specific typology, with examples for revealed wide regional differences in the number each type. The subnational MCPAT in Mexico identified of anticompetitive regulations, as well as important common government interventions that can impact variations in their nature and effect. Nuevo León has competition in local markets based on the team’s adopted 72 rules that reinforce dominance and limit MEXICO extensive experience in assessing Mexico’s regulatory entry (Figure 14), while Baja California Sur has more rules 29 Figure 11. Standard questions to identify regulations potentially harmful to competition Identify sub segments of the industry Key aspects that need to be identi ed in the assessment of speci c regulations n Role of business association Entry regime Behavioral regime Economic regulation ts in the industry/agreements ? Private or public initiative? When there is more than one When there is more than one Can business associations decide competitor in the market, are the competitor in the market, are rates on entry? Are they consulted prior s? Limited number of licenses? following conditions regulated? for final services regulated? to entry or prior to setting new rates? Monopolistic rights (geographic • opening/operation hours Are minimum prices set? y and temporary exclusivity) • conditions for selling products Does the regulation foresee a role • minimum distances Are maximum prices set? for business associations within Do they have competition for the • minimum quality standards the regulatory process? for market mechanisms? Are licenses granted to business Preference for certain type of associations instead of individuals of operators in the market? or individual firms? Priority entry rights for SOEs? Does the regulation promote Es? agreements among competitors? ould be Source: Author’s elaboration. Note: This list presents a basic set of questions that are applicable in most circumstances, but it should not be regarded as exhaustive. Additional questions should be tailored to the local legal and regulatory context. that are conductive to collusive outcomes or increase regulatory barriers is more likely to include a binding the costs of competing in the market (Figure 15), and constraint on firm entry and expansion, that the challenge Hidalgo has more rules that discriminate and protect of complying with numerous distortive regulations is vested interests (Figure 16). An analysis of selected WBG- itself an obstacle to competition, that a large number of led projects in Oaxaca, Tabasco, and the State of Mexico regulatory barriers indicates the presence of powerful highlighted further differences in the degree to which vested interests, or some combination thereof. Further these regulations restricted competition (Annex II). empirical analysis could shed greater light on the relationship between the number of regulatory barriers A simple correlation analysis indicates a potential and firm dynamics and market variables. link between the number of regulatory barriers and multiple firm dynamics. The analysis found that the The following section describes each category of Subnational MCPAT Application number of regulatory barriers identified in the context anticompetitive regulation and provides specific of Justicia Cotidiana was associated with the average examples of government interventions at the growth rate of the number of firms26 (Figure 17) and the subnational level in Mexico. The examples deliberately net growth of sales by firm (Figure 18) between 2009 focus on markets in which competition is viable, as and 2014.27 This may indicate that a larger number of opposed to natural monopolies. While regulation is 26 INEGI defines these as “economic units.” MEXICO 27 Even though these regulatory barriers were identified between 2015 and 2018, it can safely be assumed that almost all of them were already in place between 2009 and 2014. 30 Figure 12. A typology of regulations based on their market effects General typology based on effects Specific typology Specific examples Ban on permits Restricted # of establishment or permits/quotas Monopoly rights and absolute Permits only by official initiative bans for entry Temporary exclusivity Minimum distance rules Relative bans for entry and Geographic exclusivity expansion of activities Permits for limited geographic Competitors’ opinion needed areas/clients to enter Rules that reinforce Incumbents participate in dominance entry decision or limit entry Restrictions on permit Other associations’ opinion assignments / transfers required to enter Registration/permit regime Requirements for registry Opinion of other (licenses and permits) authorities required Annual renewals/ unnecessary requirement Regulations allow/promote agreements on key variables Rules that facilitate agreements Association membership among competitors needed to enter Rules that are Regulated business days/times conducive to collusive Enhance the powers/scope of outcomes or increase co-regulation/business associations costs to compete in Restrictions on type of products Limits on discounts/sales the market and services/format and location Maximum prices/rates fixed by authorities Restrictions on advertising Price control Restriction to supply low cost services Discrimination against certain types of firms Discriminatory application Lack of standard permitting Subnational MCPAT Application of rules or standards rules/criteria Rules benefitting incumbents Discretionary application Rules that of rules Reduced accountability discriminate and State control of/participation in protect vested markets/ regulators provide services interests Lack of competitive neutrality Unfettered official capacity vis a vis government entities to change/cancel permits Preferential treatment to state-owned firms MEXICO State aid/incentives distorting level playing field Source: MCAPT. Note: The specific examples of regulatory restrictions in dark blue are generally considered more restrictive to competition than those in light blue. 31 Figure 13. The number of regulatory restrictions Figure 14. The number of rules that reinforce identi ed in key sectors market dominance or limit entry Figure 15. The number of rules that are conducive Figure 16. The number of rules that discriminate to collusive outcomes or increase the costs of and protect vested interests competing in the market Source: CONAMER, MCPAT application under Justicia Cotidiana. Note: The number of regulatory restrictions was weighted by the number of sectors covered in each state (usually 3, and in some cases fewer), in order to make the map comparable. In one state, up to 165 restrictions were found across 3 sectors. Darker shades of blue reflect a higher number of regulatory restrictions to competition. These figures therefore represent the minimum number of potential regulatory restrictions to competition that may exist in each state. often justified and even necessary in order to ensure Rules that reinforce dominance or Subnational MCPAT Application efficient market outcomes, subnational governments in limit market entry Mexico frequently employ economic regulation in cases where market characteristics do not warrant it. Such Competitive markets are characterized by the ability regulations can be eliminated, or replaced with simple of new firms to enter the market and the ability of ex post monitoring mechanisms to enforce minimum existing firms to expand or exit. Indeed, the potential standards, without the need to establish alternative for competitors to enter, even if no competitors actually MEXICO regulations. do so, may suffice to discipline incumbent firms and 32 Figure 17. The average growth rate of the number Figure 18. The average rm-level net sales growth of rms (2009-2014), and number of regulatory rate (2009-2014), and the number of regulatory barriers identi ed barriers identi ed 0,00020 1,0 Baja California Sur 0,8 Yucatán 0,00015 Guanajuato Guerrero Oaxaca Nayarit Nuevo León Chiapas Hidalgo Baja California 0,6 Querétaro Durango México Aguascalientes Nayarit 0,00010 Yucatán Jalisco 0,4 Sinaloa Querétaro San Luis Potosí Chihuahua Michoacán Campeche Morelos Coahuila Sonora 0,2 México Ciudad de México Sinaloa Jalisco 0,00005 Veracruz Chihuahua Hidalgo Sonora Coahuila -0,0 Veracruz Guerrero Nuevo León 0 50 100 150 200 Chiapas Baja California Sur Baja California Tamaulipas 0,00000 -0,2 0 50 100 150 200 Source: CONAMER analysis, based on data from INEGI. Growth in the number of economic units is the average across sectors and weighted by sector-relevance in terms of total number of firms, per state. Note that the total number of regulatory barriers include some additional regulatory barriers identified, beyond those associated with the categories of MCPAT. For comparison purposes, states in which less than 3 sectors were analyzed have been excluded from this analysis. prevent powerful incumbents from raising prices above may delay the entry of competitors or force them competitive levels. For example, incumbent airlines have to enter the market at a smaller scale, with a reduced been found to reduce airfares on a given route by at least range of products, or with a less attractive commercial 17 percent when faced with the threat that a competing proposition. airline will begin serving that route.28 While barriers to entry can be grouped into three Unnecessary barriers to business entry and categories—legal or regulatory, structural,29 expansion can promote market concentration or and strategic30—the following analysis focuses preserve the dominance of incumbent firms. Such exclusively on legal or regulatory barriers. Legal barriers can reduce consumer choice and create artificial or regulatory barriers to entry can stem from any scarcity that increases prices. Restrictive regulations may form of public intervention in the market. According indicate rent-seeking by powerful economic interests. to the MCPAT methodology, regulations that By influencing the regulatory policy and enforcement constitute barriers to entry include: (i) rules that create processes, incumbent firms can artificially generate monopolistic rights or impose an absolute ban on the barriers to discourage the entry of new investors and entry of new firms; (ii) rules that impose a relative ban protect their privileged position. Incumbent firms are on the entry of new firms or inhibit the expansion of likely to exercise their market power and implement business activities; (iii) rules that allow incumbents to collusive agreements in concentrated markets with participate in market-entry decisions; and, (iv) rules Subnational MCPAT Application high barriers to entry. Beyond simply preventing new that create excessively burdensome licensing and competitors from entering the market, these barriers registration requirements. 28 Goolsbee and Syverson (2008). 29 Structural barriers are created by the technological conditions of the market. They include large initial capital requirements, high transportation costs, economies of scale and scope, large sunk costs, vertical integration, and cultural differences. Furthermore, the presence of network effects or externalities may create a natural monopoly and constitute a barrier to entry. 30 Strategic barriers to entry are created through the deliberate actions of incumbent firms. Some strategic barriers are legitimate business behaviors that have a limited impact on competition and ultimately increase consumer welfare, such as investments in research and MEXICO development and patent filing. However, exclusive contracts with distributors, the refusal to supply an essential input, and predatory pricing are examples of strategic barriers to entry that often result in an anticompetitive conduct. 33 Rules that create monopolistic rights or failed to reduce congestion. Adopting an absolute impose absolute barriers to entry barrier to entry set an adverse precedent regarding the use of discretionary authority to protect incumbent firms, Absolute barriers to entry explicitly entrench the and it did not address the deficiencies in the regulatory dominant position of an incumbent firm or firms. framework that created the problem. Indeed, the Regulations that create monopolistic rights severely irrational granting of concessions itself stemmed from and unambiguously reduce competition by directly the excessive discretionary power of public agencies to preventing new firms from challenging incumbents, grant those concessions. As these discretionary powers effectively establishing private or public monopolies or remained unchanged, the ban compounded the oligopolies in specific markets. While absolute barriers to underlying problem instead of addressing it. entry may be justified in a narrow range of cases—for example, the regulation of natural monopolies or the In addition, the municipal government of the allocation of rights to scarce natural resources—they state capital, Oaxaca de Juárez, imposed bans on should not be applied to markets that would otherwise certain retailers. During the last year of its mandate, be competitive. the municipal government barred the granting of new licenses for restaurants, bars, and other businesses that Regulations that create monopolistic rights or bar the serve or sell liquor. It also imposed a de facto ban on entry of new firms are among the most harmful, and any new permits for street vendors. These measures the most common, anticompetitive regulations in were meant to address social problems, including Mexico. The subnational MCPAT revealed 69 subnational corruption and informality. However, other regulatory regulations that constituted absolute barriers to entry. In measures could have achieved the same objectives Mexico State, Tabasco, and Oaxaca, the WBG prioritized with a less-negative impact on competition, such as seven reforms to address these restrictions, which the reducing discretionary administrative powers, increasing MCPAT found to be most common in transportation and transparency, and strengthening regulatory supervision retail sectors nationwide. Examples of absolute barriers and enforcement mechanisms. to entry in Oaxaca highlight their distortive impact. Rules that create a relative barrier to entry In Oaxaca, the state government banned all or inhibit the expansion of activities transportation concessions for a two-year period. Under the state laws that prevailed when the assessment Less stringent than an absolute ban on entry, was conducted, all passenger and cargo transportation marginal or relative restrictions seek to maintain firms were required to obtain a concession to offer the current market structure by limiting the number services anywhere in Oaxaca. In principle, such of competitors or the range of activities they can concessions were supposed to be granted only if the engage in. These rules are usually justified by the claim service was deemed viable and necessary to meet that a market is saturated and cannot sustain additional demand. In practice, however, there was no standard businesses. However, a regulation that prevents firms procedure to assign routes, and the authorities had from entering a saturated market contradicts its own premise: if the market were truly saturated, new firms Subnational MCPAT Application detected close to 14,000 irregularly granted concessions. Some passenger routes were congested, while others would be unable to gain adequate market share to had excess capacity. The state government responded survive, and regulations impeding their entry would by passing an absolute ban (veda) on new concessions be unnecessary. Instead, marginal restrictions hinder for two years. legitimate competition by limiting access to input or distribution channels, or by establishing minimum Contrary to the policy’s intent, barring the entry of distances between outlets or processing facilities. MEXICO new transportation firms increased informality and Examples of this kind of regulation include quotas on the 34 number of permits issued for certain types of business COFECE has actively promoted the elimination of or the number issued to a single firm, the granting of rules mandating minimum distances between gas licenses for limited geographic areas or clients, and stations, especially in the wake of the federal energy restrictions on transferring permits. reform. In 2012, COFECE issued an opinion on the impact of these rules on competition and determined Marginal barriers to entry or expansion are common that undefined “security reasons” were an insufficient in Mexico. The subnational MCPAT revealed 421 relative justification. COFECE ruled that these types of restrictions barriers to entry, most of which were in the retail sector. prevented markets from functioning efficiently by In Mexico State, Tabasco and Oaxaca, the WBG prioritized protecting existing businesses from actual and potential four reforms to address these restrictions. Examples competitors and by preventing the market forces from of relative barriers to entry in Oaxaca and Culiacán determining the optimal number and distribution of underscore their adverse effects on competition. businesses. In 2017, the State of Sinaloa eliminated minimum distances between gas stations, which had The municipal government of Oaxaca de Juárez been up to 5 kilometers.32 The same year, COFECE issued regulations restricting licenses for retail firms formally challenged the constitutionality of minimum and investments. The regulations limited the number distances before the Supreme Court, referring to a case of licenses for outlets in public markets and pedestrian in the State of Coahuila, which had established minimum areas that can be awarded to any individual competitor, distances of between 500 meters and 10 kilometers thereby constraining the expansion of successful between gas stations.33 In its arguments, COFECE has retailers. The municipality also established a minimum often referred to the importance of competition among distance between businesses that sell or serve alcoholic gasoline retailers to ensure that the benefits of opening beverages. Making it more difficult for consumers the energy markets are passed on to consumers. to comparison shop across establishments located several hundred meters apart created local market Geographic restrictions on tortilla stores remain power for incumbents and effectively limited consumer common in Mexico. COFECE has also repeatedly issued choice. Though restricting the ability of firms to sell opinions detailing how minimum distances between alcohol in the vicinity of schools, hospitals, churches or tortilla stores limit competition, including in Tapachula sports fields may have valid public-policy objectives, (Chiapas), Tuxtla-Gutiérrez (Chiapas) and Salina Cruz establishing a minimum distance between business that (Oaxaca). As early as 2010, the Office of the Federal sell alcohol meaningfully restricts competition. Prosecutor for the Consumer (Procuraduría Federal del Consumidor, PROFECO) had highlighted the frequency The Culiacán municipal government similarly, and of restrictive regulations in this market and their adverse even less justifiably, established minimum-distance impact on household consumption.34 regulations to limit competition among gas stations and tortilla stores.31 The minimum distance between Across Mexico, regulations on notaries commonly gas stations varied from 450 meters to 10 kilometers, restrict the entry of new professionals and their while the minimum distance between tortilla stores was ability to expand their services. In 31 out of 32 fixed at 400 meters. To obtain an operating permit, store federative entities, notary associations are tasked with Subnational MCPAT Application owners were forced to sign a written commitment not supervising the implementation of state laws regulating to conduct business activities less than the minimum notary services. These laws often hinder competition by distance from their competitors. directly restricting the number of notaries. In 18 federative entities, the number of notaries is limited by the number 31 Municipality of Culiacán (2007) as reported in COFECE (2012), Municipality of Culiacán (2004). 32 Noroeste (2017). MEXICO 33 El Sol de Mexico (2017). 34 García & García Soto (2010). 35 of inhabitants per municipality or judicial district. In These restrictions are relatively uncommon, but some cases, the number of notaries is capped at one per particularly harmful to competition. The subnational 50,000 inhabitants. According to COFECE, tighter limits MCPAT revealed 90 instances of incumbents participating are linked with higher fees for notary services, but not in entry decisions, most often in the transportation and necessarily with higher service quality.35 Notary service agribusiness sectors. In the case of Mexico State, Tabasco, state laws also frequently allow for discretion in licensing and Oaxaca, the WBG prioritized two reforms to address notaries. In most federative entities, the executive branch this type of rule. Examples of incumbents participating can grant licenses “when in its judgment, the increase in in entry decisions in Sonora and Chiapas highlight the business activity requires it” or “taking into account the impact they can have on local markets. needs of the notary service itself.”36 These criteria are not objective. They generate uncertainty for potential Sonoran state law allows incumbents to influence new notaries and do not promote service quality. Some decisions regarding the entry of new commercial notary service state laws establish requirements that are livestock producers. The state’s Livestock Law requires not justified by a public-policy objective. In 26 federative that any individual or company that raises or markets entities, some requirements are highly subjective and livestock, animal products, or animal byproducts must lack any clear relationship to notarial functions. These obtain formal authorization to enter and leave Sonora. include “good conduct,” “an honest way of living,” “an Requests for authorization must be submitted to the honorable reputation,” and “good morals.”37 Additionally, livestock union or the state Livestock Secretariat. The 28 federative entities establish a minimum age for union or the secretariat can then issue an opinion as notaries, which ranges from 25 to 33 years old. to whether the requesting party should be granted authorization. This regulation enables incumbents to Rules that allow incumbents to influence influence which firms and individuals are able to access decisions as to which firms can enter the the Sonoran livestock market.38 The law specifically states market that the authorizing entity should take into account the union’s opinion and ensure that the entry of new Rules that allow incumbents to influence decisions participants does not affect existing producers or disrupt regarding the entry of new firms can enhance their the state’s supply of livestock and related products. market power. Some jurisdictions give professional Granting incumbents the power to limit participation of associations the legal right to decide whether new competitors tends to restrict competition. suppliers are eligible to provide a service. These regulations are based on the premise that only a limited The city of Berriozabal in the State of Chiapas number of firms can operate effectively in a given allows existing firms to veto the entry of new market. Under them, policymakers may grant existing tortilla producers. The regulations of both the State suppliers the right to veto a new entrant, protecting of Chiapas and the city of Berriozabal allow existing them from competitive pressure at the expense of the tortilla producers to participate in the decision to allow interests of consumers. new firms to enter the market.39 By law, three current Subnational MCPAT Application 35 COFECE (2017). 36 Ibid. 37 Ibid. 38 Article 86 of the Livestock Law for the State of Sonora states: “For the introduction or departure of the State of livestock, its products and by-products, must have the authorization previously issued by the Secretariat and, in addition, the mobilization must be covered with the transit guide issued by the inspector of livestock and with the corresponding health documentation. The respective requests must be made through the Regional Livestock Union of Sonora, who will express its opinion on the matter”. Article 67 of the same law states: “For the issuance of authorizations mentioned in Article 86, the Secretariat, in case of livestock products and by-products, must take into consideration, in advance, the opinion of the corresponding cooperation agencies, as well as the needs of the population, so that the producers and the supply of products for the State population are not affected.” MEXICO 39 Article 13 states that: “For the regulation of opening of establishments and distribution of tortilla dough and tortillas, a Technical Advisory Committee will be created, which will be integrated by the Municipal President, who will be the President of the Technical 36 tortilla producers must form a Technical Advisory suited to determine whether an activity has a negative Committee, which has the power to “issue an opinion impact on the public interest, especially since a business on the opening and operation of the tortilla shops, as that initially meets the necessary criteria to obtain the well as any irregularities or controversies that may arise permit may not continue to do so over time. regarding the requests for operating permits.” Authorization regimes are particularly common Rules that create excessively burdensome in Mexico. The subnational MCPAT revealed 390 cases licensing and registration requirements of unnecessary or excessively burdensome license and permit requirements. However, the harm these Even regulations that do not directly restrict market rules cause to market dynamics depends on both the entry can increase the administrative cost to new specific features of each market and how the rules are entrants. Some of these rules apply to market entrants implemented. Consequently, authorization regimes are themselves—for example, by requiring that would-be not always a priority for reform. In the case of Mexico service providers obtain membership in a professional State, Tabasco, and Oaxaca, the WBG prioritized one organization. Other rules impose restrictions on specific reform to address unnecessary license and permit goods or services—for example, by requiring the costly requirements. Examples of excessively burdensome testing and registration of crop varieties. authorization regimes in the State of Nuevo León underscore their impact on local markets. Licenses, permits, or other authorization regimes that impose disproportionate requirements on new Transportation providers need separate permits entrants can restrict competition. While the nature to travel through the jurisdictions of at least nine of some markets justifies the imposition of minimum municipalities in Nuevo León, and these permits standards on market participants, authorization regimes must be renewed each month.40 Transit and roadway can also unnecessarily increase costs and discourage regulations require that companies transporting cargo the entry of new competitors. Onerous compliance or loading and unloading merchandise must obtain processes and requirements that licenses be renewed a separate permit for each municipality in which it frequently raise the administrative burden of establishing operates. These permits must be renewed every 30 days a new business, particularly when the authorities pass for a significant processing fee, and the requirements the cost of verifying compliance on to businesses in the for obtaining a permit are unclear. As part of an form of licensing fees. investigation into anticompetitive regulatory barriers, COFECE concluded that this permit scheme hinders free License and permit rules that require multiple transit and increases transactions costs, which in turn authorizations from different local authorities can boost production and distribution costs across various further limit market access. These rules are often based economic sectors. The transportation sector represents on the reasonable premise that granting new licenses approximately 8 percent of economic output in the for a certain activity may adversely affect the interests state of Nuevo León. The Monterrey metropolitan area of other sectors and/or conflict with larger policy includes 70 industrial and technological parks, and objectives. However, by prioritizing ex ante controls, trucking is essential to the local economy. At the national Subnational MCPAT Application this type of regulation deters new market entrants and level, domestic shipping costs average 2 percent of the empowers incumbents. Ex post evaluations are better total costs of manufacturing inputs. For some industries, Advisory Committee, three aldermen and three industrialists in the market of tortillas, who will be democratically elected among the groups of people in the branch, established for that purpose in the municipality.” Article 15 further establishes that: “The Technical Advisory Committee has the power to issue an opinion on the opening and operation of the tortilla shops, as well as any irregularities or controversies that may arise regarding the requests for operating permits.” MEXICO 40 This is the case in the municipalities of Guadalupe, San Nicolás de los Garza, Apodaca, Escobedo, San Pedro Garza García, Santa Catarina, Juárez, Santiago, and Monterrey 37 such as cement products, this share rises to 15 percent. association to obtain market access facilitate cartel Eliminating transit permits would reduce the costs of agreements. Professional or business associations may transportation, with positive spillover effects across the adopt mandatory rules for their members that reduce Mexican economy. competition. Preventing associations from abusing their power may require ensuring that any self-regulation Rules that are conducive to or co-regulation functions are subject to the relevant collusion or that increase the cost of competition law enforcement and that association rules competing in the market require government approval. Regulations can facilitate tacit collusion or explicit Regulations that support collusive behavior are both cartel agreements. While the former is generally not particularly harmful to competition and common illegal, explicit agreements among competitors to across Mexican states. The subnational MCPAT revealed limit competition are considered the most egregious 102 instances of rules that promote agreements among violation of competition law. Both types of collusion competitors, especially by empowering associations to reduce consumer welfare, and cartel agreements have coordinate or self-regulate. These rules were found to be been shown to raise prices by an average of 49 percent.41 most common in the transportation and retail sectors. The theoretical and empirical literature identifies several In the case of Mexico State, Tabasco, and Oaxaca, the factors that facilitate collusive outcomes.42 In addition WBG prioritized two reforms to address this type of to structural factors (e.g. inelastic demand, regular rule. Examples of regulations potentially enabling and frequent transactions, lack of buyer power) and cartelization in Chiapas, Mexico City and Oaxaca factors influenced by firms themselves (e.g., excess highlight their negative effect on competition. capacity), regulatory factors such as the power granted to business associations or rules that establish price In Chiapas, city officials in the city of Tuxtla Gutiérrez floors and ceilings can encourage collusive behavior. authorized an illegal agreement among tortilla Regulations that limit the scope for innovation and producers to divide up the municipal territory the potential variety of products can also exacerbate into exclusive delivery zones. Municipal officials and product homogeneity, which enables stable collusive representatives from two tortilla associations divided the agreement. municipality into four territories each of which would be restricted to designated set of tortilla producers, The subnational MCPAT identified four types of rules effectively creating four local oligopolies. Operational that promote the formation of cartels or increase the and oversight mechanisms were also entrusted to cost of competing in the market. These are: (i) rules the producer associations. To deliver tortillas, a service that facilitate agreements among competitors; (ii) rules provider had to obtain a license from the Municipal that restrict the type of products and services available, Economic Development Department authorizing its as well as their format and location; and, (iii) rules that vehicles to serve a given area. The vehicles and staff establish price controls. uniforms were assigned a specific color for the area in which they were authorized to operate. The tortilla Rules that enable agreements among producers would enjoy exclusive rights in each of their Subnational MCPAT Application competitors territories, from which all competitors would be barred. Producers that breached the agreement could be Regulations can allow for, or even promote, collusive punished by the withdrawal of their license and their agreements between competitors. Regulations expulsion from the market. requiring membership in a professional or business MEXICO 41 Connor (2014). 42 See Motta (2004) and Purfield et al. (2016) on factors facilitating cartelization in South Africa. 38 The authorities ruled that this agreement constituted commercial businesses are unconstitutional because an absolute monopolistic practice by “dividing, they inappropriately restrain free competition. distributing, allocating or awarding market portions or segments in specific areas.”43 The agreement forced The State of Oaxaca established exceptional consumers to buy only from the tortilla delivery service procedures to exempt certain firms from the that was authorized to operate in each area, violating standard public-procurement tender process, which their freedom of choice, and it entirely eliminated the is designed to safeguard competition and prevent potential benefits of competition between producers. bid rigging. The state government set no limit on The authorities imposed sanctions, and all the the percentage of acquisitions that can be exempted participating economic agents were punished, as well from the standard process, allowing numerous tenders as the city officials that participated in or condoned the to be carried out under exceptional procedures that agreement, including the Municipal President. do not comply with competition requirements. The government also created qualitative exceptions to In 2011, Mexico City strictly limited the location of standard public tender procedures with no justification. supermarkets and retail shops to specific zones. The State law does not prevent bid-rigging cartels from using city issued an urban planning bylaw that specified zones subcontracting as a reward mechanism, as bidders are in which new self-service shops selling food and basic not obliged to justify the need to subcontract, and the necessities, clothes, footwear, and other consumer goods winner of a bid is not prohibited from subcontracting to would be allowed to open. The rule applied exclusively to losing bidders. Moreover, public procurement units are supermarkets, minimarts, convenience stores and similar not required to conduct market research on price levels establishments. Other shops that sold the same goods, to identify artificially inflated bids that indicate collusion. such as grocery stores, public markets, and sundry shops were exempt from the rule. The purpose of the zones was Among Michoacán’s 113 municipalities, 34 issued “to protect public markets and small establishments from regulations restricting business decisions and competition by self-service establishments.”44 Before limiting competition. Regulations affecting prices, the regulation had been approved by Mexico City’s operating schedules, and minimum distances between parliament, COFECE identified several anticompetitive competitors were found in 34 municipal regulations. implications, including: (i) segmenting the market and Minimum distances and other spatial restrictions were limiting participation; (ii) protecting incumbents from the most common obstacles to opening and operating competition and thereby creating rents unrelated a business related to the sale and distribution of tortillas. to efficiency; (iii) limiting consumer choice; and (iv) For example, the Regulation on the Dough and Tortilla discouraging efficiency improvements among existing Industry for the Municipality of Tancítaro, established businesses. Mexico City’s legislature approved the rule that the municipal government, with the advice of the despite COFECE’s warnings. The Office of the General Municipal Union of Dough and Tortillas Manufacturers, Prosecutor (Procuraduría General de la República) later can establish a fixed price for tortillas. challenged the bylaw as a violation of consumer rights, and it was found to be unconstitutional. The court Rules that restrict the variety of products confirmed that federative entities should refrain from and services available to consumers Subnational MCPAT Application enacting policies that will negatively impact the supply of consumer goods. This decision was aligned with prior Rules that limit the variety of products and services judicial rulings that regulations establishing minimum available to consumers can damage competition. distances between competitors or exclusive zones for These restrictions can apply to opening hours or days, 43 This cartel was fined in 2012 by the former Federal Commission on Competition (Comisión Federal de Competencia). Ministry of Economy MEXICO (2012). 44 Regulation 29 is intended to promote fairness and competition in the retail sector. 39 promotions and discounts, quality standards, the purpose is to enhance product quality or safety, directly physical characteristics of retail outlets, or the number regulating those aspects of the good or service may be or placement of items in commercial establishments. both more effective and less distortive. Similarly, price Restrictions on the availability of products and services ceilings may reduce incentives to innovate by providing constrain entrepreneurial freedom, limit the potential new or higher-quality products if their price would for innovation, and weaken incentives to compete on exceed the established maximum. Price ceilings can variables other than price. also encourage collusion between suppliers, as all prices tend to approach the ceiling, even when the product Product quality standards that advantage could be supplied at a lower price. Price ceilings may incumbents, or that privilege some suppliers over prompt some suppliers to exit the market, distorting the others, may have an especially negative impact on range of products available, or they may lead suppliers to competition. Even when these standards effectively impose hidden charges to circumvent the price ceiling. promote product quality—which is not necessarily Price ceilings are often intended to protect consumers the case—they may still reduce consumer welfare by from high prices, but there may be less distortive preventing fully informed consumers from deciding to means of achieving this objective. For example, if high buy cheaper, lower-quality goods. prices reflected anticompetitive behavior, enforcing competition law and lowering barriers to entry would These restrictions are also common in Mexico. The be preferable. In other cases, price subsidies may be less subnational MCPAT revealed 610 instances of rules that distortive than price controls. restrict the availability of products and services. However, these restrictions are not always a priority for reform, Price controls can badly distort competition, but they as their impact on competition varies across markets are relatively uncommon in Mexico. The subnational and according to the design of the rules. In the case of MCPAT revealed just 56 cases of price controls. Mexico State, Tabasco and Oaxaca, the WBG prioritized two reforms to address this type of restriction. The municipal government of Puebla regulated prices for public parking lots. In February 2007, the Rules that establish price controls municipality amended its regulations to allow the municipal government to fix parking lot rates, including Price controls also distort competitive behavior. fines and penalties. COFECE objected to this regulation, Although they vary by sector, price controls can arguing that it had an anticompetitive impact because generally be classified as either direct mechanisms such eliminating pressure for businesses to compete by as price ceilings, price floors, or fixed commercialization offering lower prices would reduce consumer wellbeing. margins, or indirect mechanisms through which trade COFECE’s ruling went on to state that price controls associations or agents negotiate price conditions were only warranted in exceptional circumstances, as a or establish pricing guidelines under government response to market failures, and should be imposed only supervision. after consultations with the competition authority. While regulating prices in natural monopolies, Rules that discriminate between firms Subnational MCPAT Application such as public utilities, might be warranted, price and protect vested interests controls can have adverse effects in competitive markets. Price floors prevent more efficient suppliers A level playing field ensures that firms compete on from offering goods and services at prices below the the merits of their products, that they face economic established minimum. Consequently, price floors tend incentives to operate efficiently, and that resources to discourage efficiency while increasing producer are allocated to their most productive use. Rules that MEXICO surplus at the expense of consumers. If a price floor’s favor certain firms and disadvantage their competitors 40 distort efficiency incentives and slow productivity The discriminatory application of rules is both deeply growth. An analysis of firm-level data in Tunisia revealed distortive and common in Mexico. The subnational that barriers to entry embedded in the country’s MCPAT revealed 480 instances of discriminatory rules investment laws favored politically connected firms to and standards which were found to be most common the detriment of productivity and consumers.45 Politically in the transportation sector. In the case of Mexico State, connected firms were larger than nonconnected Tabasco, and Oaxaca, the WBG prioritized 10 reforms to competitors, both in terms of employment and output, address discriminatory rules. Examples from the State of and they were more profitable, but their average labor- Sinaloa highlight the negative impact of discriminatory productivity growth rate was lower. Similarly, micro-level rules on competition. census data in Slovenia showed that state aid to rescue and restructure struggling firms hindered the efficient Sinaloa’s state government favored local truckers static allocation of resources in the manufacturing when granting trucking concessions and transit sector.46 permits. According to the state’s 2015 Traffic Law, cargo transportation providers were required to apply Therefore, the third category of anticompetitive to the state executive for a concession and a zone government interventions encompasses regulations permit. The zone permit authorized the provision of that unjustly discriminate between firms, or that transportation services only within a specific territory of reduce competitive neutrality and protect vested the state, frequently corresponding to one of Sinaloa’s interests. These regulations typically include: (i) the 18 municipalities. The law further established that discriminatory application of rules or standards; (ii) the concessions and permits would be granted preferably discretionary application of rules and standards; (iii) the to unions, industry alliances, and cooperative societies, lack of competitive neutrality vis-à-vis government even if they offered lower quality, higher prices, or did entities; and (iv) state aid or incentives that distort the not reflect the preferences of users. This law discouraged level playing field. the entry of new suppliers in the transportation market. It also segmented the market geographically and by The discriminatory application of rules or product, and it reduced the intensity of competition standards between suppliers from different regions. For example, in the 18 municipalities a single concessionaire controlled The discriminatory application of rules and more than 60 percent of the permits for transporting standards includes explicit discriminatory agricultural products. treatment among market entrants or against specific types of firms, such as foreign firms, small New entrants were required to wait up to a decade firms, or new market entrants. Restrictions that benefit for authorization. The legal framework provided little incumbents are particularly damaging to competition, clarity on deadlines, procedures, and requirements to as they increase the relative cost of entry for potential obtain permits. On average, it took the state 8.6 years competitors. Some policies or regulations significantly to respond to one request. This uncertainty inhibited raise costs for new firms relative to existing firms— the entry of new service providers and discouraged for example, regulations or policies that introduce or investment. Due to the absence of new competitors Subnational MCPAT Application reinforce “grandfather clauses,” under which incumbents and the length of application procedures, the Sinaloan are allowed to continue operating under an older set of trucking fleet was about 18 years older than the federal rules, while new entrants are subject to a new set of rules. fleet and provided a poor quality of service. Due to the Grandfathering clauses can impair access of new players zone restriction on trucking permits, truckers could not to limited resources needed to compete effectively. load products outside their authorized area, and empty MEXICO 45 Rijkers, Freund & Nucifora (2017). 46 Schweiger (2011) 41 backhauls further reduced profitability and logistic in Mexico State required a DIR to execute any major efficiency. The state also had full discretion to set or commercial or infrastructure project, and in many cases modify fees for cargo transportation and could redraw small and medium commercial developments must the zones at will. The authorization regime distorted also satisfy this requirement. Obtaining a favorable DIR prices and did not reflect market conditions. In 2015, requires the approval of various state and municipal COFECE investigated the impact of these regulations entities, which lack specific deadlines for issuing and ordered that they be amended. their judgements, significantly increasing the cost of commercial investment. The discretionary application of rules or standards The legal framework also granted municipalities the power to determine additional circumstances Laws and regulations that provide authorities with in which a favorable DIR would be required. broad discretion to apply rules and standards can Therefore, all investment projects were exposed to result in discriminatory treatment, even when the potential municipal discretion over their approval. The statutes involved do not explicitly discriminate. municipalities were also allowed to determine when the All laws and regulations that fail to establish objective DIR would be required, increasing the unpredictability requirements for awarding licenses, or that create of the process and intensifying the risk of discriminatory oversight mechanisms with arbitrary power to impose treatment. sanctions, are vulnerable to excessive discretion, which can lead to the discriminatory treatment of firms An analysis of the municipal requirements to obtain a and facilitate corruption. The unfettered authority of DIR revealed that in practice the requirement applied state or local governments to alter or cancel permits to construction areas much smaller than those creates uncertainty, which discourages investment and established by state regulations. The DIR requirement promotes informality, which negative implications for also applied to a wide variety of establishments whose competition and consumer welfare. operation presents no inherent risk that would justify such a procedure. Moreover, there was no correlation Excessive regulatory discretion is common in between the population size of the municipality and the Mexico. The subnational MCPAT revealed 199 instances threshold for which a DIR was required. of the discretionary application of rules and standards, primarily in the retail sector. In the case of Mexico State, An analysis of the distribution of Mexico four Tabasco, and Oaxaca, the WBG prioritized 13 reforms largest retail chains—Walmart, Soriana, Comercial to address this weakness in the regulatory framework. Mexicana, and Chedraui—across Mexico State Examples of excessive regulatory discretion from Mexico municipalities indicates that the entry costs created State highlight its anticompetitive impact. by the DIR influenced their decisions regarding the establishment of new supermarkets. Municipalities In Mexico State, a burdensome and discretionary that did not require a DIR for any investment types procedure obtaining building permits distorted beyond those mandated in state law had a greater competition between firms. Contrary to administrative variety of supermarkets than did municipalities that Subnational MCPAT Application best practices in other Mexican states, depending on imposed DIRs for additional investment types. The the size and type of productive activity that a new or excessive discretion afforded to municipal authorities expanding store or commercial complex engaged in, appears to have a negative impact on competition and Mexico State required that investment projects have distorts the entry decisions of investors. a favorable Regional Impact Judgement (Dictamen de Impacto Regional, DIR) in order to obtain a municipal The discretionary application of economy-wide MEXICO land-use license. The vast majority of municipalities regulations has also been identified more broadly 42 across Mexico’s municipalities. The 2016 Doing private partnerships in which it contributed land Business report assessed the number of procedures, for the construction of industrial parks by private the time, and the cost required for a laundry business developers, which operated under a condominium to obtain connections to the water and sewerage model. FIDEPAR sold lots at below-market prices, and networks in 16 Mexican municipalities. These time and it offered financing conditions more favorable than cost requirements were found to vary substantially those offered by the private sector. Moreover, FIDEPAR across municipalities, ranging from three weeks to three itself acted as a developer, leveraging its initial land months, and potentially advantaging some firms over assets and drawing directly on state resources to gain others. an advantage over private developers. Finally, the end users of lots developed by FIDEPAR gained an advantage Lack of competitive neutrality vis-à-vis over competitors in non-FIDEPAR lots, as they were not government entities required to finance the operation and maintenance services of the park. Rules that weaken competitive neutrality can distort competition by privileging SOEs over private State aid or incentives that distort the level firms. These rules may offer SOEs a range of undue playing field advantages over private competitors, such as exclusive rights to engage in a given activity, preferential access Public authorities can distort competition by to government land or other resources, public subsidies intervening in the market to support certain public and loans, or an easier regulatory compliance process. or private beneficiaries. Governments can provide direct financial support via subsidies, or indirect support Lack if competitive neutrality is rare in Mexico. The via tax exemptions, concessional loans, preferential subnational MCPAT revealed at least one instance in access to public resources or various incentive programs. which competitive neutrality had been compromised. In Authorities at all levels of government may employ the case of Mexico State, Tabasco, and Oaxaca, the WBG these tools to advance various public policy objectives, prioritized five reforms to address this issue. but if state aid and incentive policies are not properly designed, they can skew competitive advantages in In the State of Mexico, a trust established to support favor of certain firms. the development of industrial parks was allowed to directly intervene in the market. Under its regulatory Investment incentives granted to select firms framework, the Trust for the Development of Industrial can negatively affect competition through two Parks and Zones in the State of Mexico (Fideicomiso para channels. First, they can facilitate anticompetitive el Desarrollo de Parques y Zonas Industriales del Estado behavior by protecting dominant firms, unduly de México, FIDEPAR) was solely focused on promoting incentivize industry consolidation (which increases the and supporting private investment in parks owned by risk of cartel formation), and create barriers to entry that the state. Per its institutional policy, FIDEPAR appears prevent future competition. Second, they can generate to have limited its activity to market segments that inefficiency by weakening incentives to improve would have been underserved by the private sector. production and innovate, and they can drive out more Subnational MCPAT Application However, the state also directly engaged in commercial or equally efficient firms that do not benefit from the activity in the industrial parks through FIDEPAR, despite incentive scheme. Therefore, investment incentives policies to the contrary. FIDEPAR sold land (part of the must minimize negative effects on competition while assets of the trust) in the form of homogeneous lots targeting a specific policy goal. to small and medium-sized industrial units, putting itself in direct (and unequal) competition with private In the state of Tabasco, about 30 percent of public MEXICO real estate developers. FIDEPAR also formed public- funds are spent on transfers, assignments, grants, 43 and other forms of state aid. The state government administers public trust funds that are intended to provide specific aid to help enterprises develop their activities within the state. Given the volume of resources involved, these funds have considerable potential to adversely affect the level playing field in the market. The subnational MCPAT showed that public resources were allocated without any mechanisms to ensure competition, and that the objective of these fund was neither precisely defined nor closely monitored. Many support programs pursue generic objectives and do not explicitly address market failures or advance other regulatory objectives. This situation entails a high risk that state aid is advantaging certain firms at the expense of others. There is no system in place to prevent state aid from flowing to a small group of firms with market power. The criteria adopted to prioritize eligible projects do not account for market conditions or consider whether public funds may adversely affect competition. In several instances, public resources were allocated to companies in specific sectors without adequate transparency, leaving room for public officials to favor certain firms over others. Limited information and transparency regarding the allocation of funds may distort the level playing field. The private sector has no access to systematic information on the availability of state aid, its allocation process, its current beneficiaries, or its impact on markets. Trust-fund rules do not require transparency regarding the amounts granted, and while a prior-assessment system is in place, it only applies to one of the trust funds and does not include potential competitive distortions. The technical committee that determines the allocation of funds includes representatives from major business associations in Tabasco, heightening the Subnational MCPAT Application risk of favoritism. MEXICO 44 MEXICO 45 Subnational MCPAT Application Priority reforms and their potential effects 5 Subnational MCPAT Application MEXICO 46 T he following section identifies and prioritizes for reform if they exacerbate natural barriers to entry, reforms based on the design features and conditions that facilitate collusion, or other market practical implementation of regulations, features that lessen competition intensity. In addition, their interaction with specific market features, reforms are prioritized whenever they address local and the feasibility of altering or eliminating them. economic development challenges caused by a lack of The section describes the ways in which different competition, such as below-average retail sales growth, regulatory barriers affect competition, defines a priority low rates of capital renewal in the transportation set of reforms, gauges their impact on competition, sector, or an inadequate supply of construction- and evaluates the feasibility of reforming them. The material transportation relative to consumer-goods MCPAT methodology encompasses both the regulatory transportation. In Tabasco, the analysis focuses on framework itself and its implementation. This ensures barriers to competition in the transportation of that barriers created by the actions and decisions of construction materials, as these are more economically public officials can be identified and prioritized based distortive and more tightly enforced than barriers to on the same criteria as regulatory reforms. competition in consumer-goods transportation. Regulatory barriers will only be prioritized for Finally, the feasibility assessment can help to reform if they are also implemented in a manner sequence short and medium-term reforms. Factors that restricts competition. This can occur in one of that determine the feasibility of reform include: (i) the three scenarios. In the first, a very restrictive regulation legal status of the restrictive regulations and whether is rigidly implemented. In the second, a regulation reform would require a new state law or merely that allows excessive official discretion is implemented an amendment to an implementing bylaw, (ii) the in a restrictive way. In the third scenario, a restrictive enforcement authorities and procedures required for regulation exists, but is not actually implemented. Into reform and whether it would require only the intervention which of these scenarios a given rule falls has a major of the agency championing the reform or also other impact on its prioritization, as even the most restrictive actors; (iii) the social impact of reform, including the regulations should not be regarded as high priorities if characteristics of potential beneficiaries; and (iv) the they are not implemented. Instead, the methodology presence or absence of political will to introduce the focuses on the restrictions to competition that are necessary reforms and enforce the proposed changes. Subnational MCPAT Application currently causing the most harm. Reform proposals for the retail sector in Oaxaca and Mexico State and the transportation sector in Tabasco Priority reforms address regulatory constraints that illustrate the MCPAT prioritization process (Table 3). exacerbate inherent market features and impede progress on critical development challenges at the The following section details how specific reforms local level. As discussed in the case studies throughout were selected and designed as part of the MEXICO this note, regulatory constraints become a priority subnational MCPAT in Mexico and provides two 47 Table 3 Selected priority reforms for Oaxaca, Mexico State, and Tabasco Prioritized reforms Degree of restrictiveness Feasibility of reform Indirect effects to competition Oaxaca Eliminate rules that grant High. Associations have Medium. The associations The entry of new agents in (retail) associations the right strong incentives to deny would likely oppose the the market would benefit to influence decisions access to new entrants or reform. consumers. regarding the entry of new otherwise discriminate agents in public markets. against them. Reduce discriminatory Medium. Discretion High. Changing the rule is Limiting official discretion treatment in the granting increases the risk of within the purview of the would reduce uncertainty of permits and licenses by discriminatory treatment. municipal government. and promote competition. limiting the discretion of public officials. Tabasco Eliminate concessions for High. Concessions directly Medium. The local An increased supply of (transport) tourist transportation that restrict the supply of authorities have latitude to transportation services are granted only for specific services. modify the regulation. would directly benefit the areas. tourism sector. Cease to promote High. These agreements Medium. The agreements More transportation options agreements between weaken incentives to already have the prior and lower prices would competitors regarding compete on both price and approval of the local directly benefit consumers prices and/or quality service quality. authorities, which can standards for each type of reform the regulation transportation. authorizing them. Mexico State Modify the requirement High. Obtaining a DIR Medium. The state has the Lowering barriers to (retail) that land-use licenses unnecessarily delays the capacity to change the DIR entry would encourage and zoning authorizations entry of competitors into rules, and guidelines could investment and for certain projects and the market, and the lack be established that restrict competition, reducing activities require a favorable of uniform criteria across DIR to cases in which an consumer prices. DIR. municipalities may restrict assessment is essential for competition in certain security or zoning reasons areas. and that limit the scope for municipalities to add further criteria. Source: Licetti et al. (2016a), Licetti et al. (2016b), World Bank (2014). representative examples: retail reform in Oaxaca Retail reform in Oaxaca de Juárez de Juárez and trucking reform in Tabasco. The examples differ in their nature and complexity, as the Key economic features of the retail market regulation of commercial establishments is relatively straightforward compared to the regulation of cargo Subnational MCPAT Application Mexico’s retail sector is a major component of many transportation. Each section begins by describing the local economies. In the context of concentrated retail key features of the respective market, then evaluates the markets, regulatory barriers can reduce competitive regulatory interventions of subnational governments, pressures and create opportunities for anticompetitive and concludes by discussing the reform scenario and its behavior. Anticompetitive regulatory barriers may impact. include regulations that restrict the number of firms or that ban private investment, regulations that set prices MEXICO or facilitate anticompetitive practices, regulations that 48 Figure 19. Changes in retail sales after easing restrictions on opening hours Net retail sales, in real terms: Mexico City Net retail sales, in real terms: Durango 140 200 135 180 130 160 125 140 120 120 115 100 110 80 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Note: The blue vertical line indicates when the municipal government eased restrictions on opening hours. 2003=100. Source: INEGI restrict opening hours or grant preferential treatment to safety, environmental issues, traffic congestion, and certain firms, and regulations that restrict foreign direct sometimes “commercial density” when authorizing new investment or limit trade. retail outlets. Rules on the operation of retail businesses are also very common and may address opening hours, Price competition is vital to market efficiency, pricing and promotional activities, and taxation. but retail outlets also compete on service quality, location, product range and characteristics, In recent decades, local authorities in many countries opening hours, and parking access. Regulatory have relaxed restrictions on opening hours in the interventions in retail are often designed to protect retail sector. Policymakers across the developed world, or promote certain social values (such as the imputed but particularly in Europe and Canada, have extended cultural worth of certain types of retail spaces and retail hours of operation through Sundays and weekday enterprises) and mitigate negative externalities, such as evenings to promote the growth of retail commerce. traffic congestion, pollution, job safety risks. Given the The international literature presents evidence that diversity of actors involved, the interests of retailers may such reforms are associated with accelerated economic conflict with those of wholesalers, manufacturers, and activity and productivity growth. For example, the consumers. In an effort to manage conflicting interests, deregulation of opening hours in the United States has many local jurisdictions regulate the establishment, been linked to a 5 percent increase in employment and location, expansion, products, and daily operations of a 4-11 percent increase in sales.48. In India, extending retail outlets. operating hours increased labor productivity by almost 87 percent.49 Zoning regulations on commercial real estate are Retail segments regulated by subnational Subnational MCPAT Application among the most common restrictions on new retailers entering the market.47 In addition to the authorities standard administrative permits used to implement urban planning and land-use policies, municipal and In Mexico, municipal governments set rules and local administrations often consider health, public regulations on the retail sector. Municipal regulatory 47 Boylaud & Nicoletti (2001); Spanish Defense Competition Tribunal (2003); de los Llanos Matea & Mora-Sanguinetti (2009). MEXICO 48 Kitzmuller & Licetti (2012). 49 Amin (2009). 49 powers usually encompass retail licensing, zoning Following WBG recommendations, Oaxaca changed requirements (including minimum-distance rules), its bylaws regulating commercial establishments. hours of operation, and other commercial conditions. In The reform bill was developed by the Mayor’s Office, some cases, municipalities have imposed price controls. the local Secretary for Economic Development, and Segments of the retail sector that are usually under the CONAMER, with technical input from the World Bank. purview of municipal authorities include: (i) commercial Among other changes, these reforms allowed the establishments (e.g., supermarkets, retail chains, Business Attention Unit (Unidad de Atención Empresarial) minimarts, and convenience stores); (ii) public markets; to directly authorize changes to opening hours for (iii) street vendors. all establishments of low or medium risk, potentially enabling businesses to remain open 24 hours a Municipalities across Mexico impose rules day, which increased regulatory predictability and restricting businesses’ opening hours. While many transparency. municipalities have eased restrictions, allowing retailers to remain open longer, most maintain strict limits on Two key elements of the reforms’ success were direct hours of operation. However, the available evidence engagement with municipal policymakers and the suggests that municipalities that loosened restrictions integration of lessons learned from the international on opening hours experienced an increase in retail sales evidence into the design of the reform measures. in the months that followed (Figure 19). CONAMER’s local counterpart in charge of regulatory improvement continuously advanced the reform Reforms in Oaxaca and their effect dialogue and strategically positioned the topic on the agenda of local policymakers, enabling CONAMER and In Oaxaca, the retail subsector represents 15 percent the WBG team to present policy options directly to the of economic output. The number of retail businesses relevant authorities. In these presentations, evidence of and the sector’s share in total employment underscore the link between flexible opening hours and retail sales the importance of retail to the state’s economy. In and productivity played a significant role in making the 2008, the commerce sector encompassed 47.7 percent case for reform. To address local concerns regarding of registered businesses in the state, of which 95.8 safety and public order, the WBG team proposed a percent operated in the retail subsector, and commerce differentiated approach with respect to the sale of contributed 40.6 percent to total employment, with 88.7 alcohol. For example, among establishments that sell percent of commercial workers employed in the retail alcohol in closed containers, such as supermarkets, subsector. Microenterprises make up 99 percent of retail opening-hour restrictions should be applied only to the businesses and 89.2 percent of wholesalers, making sales of alcoholic beverages, not to the other operations the retail sector a key area for entrepreneurship and of the business. microenterprise development. The reforms increased market entry and promoted According to the National Institute of Statistics the expansion of existing firms. The largest chain of and Geography (Instituto Nacional de Estadística y convenience stores immediately extended its opening Geografía, INEGI), the city of Oaxaca de Juárez was hours, and between January and August of 2016, 26 Subnational MCPAT Application the state’s main tourist destination. In 2013, almost companies extended their opening hours, compared with one million tourists visited Oaxaca de Juárez. The size only one in 2015.50 Meanwhile, another national chain of the tourism sector magnifies the importance of announced plans to open 24 new outlets in Oaxaca.51 commercial services. This chain employs an innovative “superpharmacy” business model that combines the services of a regular MEXICO 50 CONAMER (2016). 51 Brecha (2016); e-Oaxaca Digital Magazine (2016); FRAGUA (2016). 50 Box 5 The Effect of Opening-Hour Restrictions on Retail Sector Performance Using data on municipal regulations restricting the opening hours of retail outlets, Licetti & Dauda (forthcoming) examine the relationship between easing these restrictions and the growth of real retail sales. This study uses 2001-2013 municipality-level data from multiple sources. The principal data source for the outcome variables and most of the covariates is INEGI. The outcome variable, the annual average of the net retail sales index, comes from INEGI’s Monthly Survey of Commercial Establishments (Encuesta Mensual sobre Empresas Comerciales). The second data source is a database of municipal bylaws regulating retail commerce at the municipal level jointly compiled by CONAMER and the WBG. The analytical sample includes 32 of the 37 cities for which INEGI has information on retail sales indices. To evaluate the effect of opening-hours restrictions on retail sales outcomes, the analysis estimates a cross-sectional time-series regression: (1) where lnQit is the logarithm of the annual average of the index of real net retail sales in municipality i at time t, τt is year fixed effects, and Xit is a vector of municipal-level variables that have been found to be important predictors of retail sales. The key independent variables are three indicator variables that split the mean hours of operation across standard store, restaurant, and supermarket subgroups into quartiles, with the cutoffs (D) based on the pooled distribution, to obtain different levels of restrictiveness. The results reveal that easing restrictions on retail shopping hours can have a positive effect on real retail sales growth. The findings imply that a change from the bottom to the top quartile of mean hours of operation across the standard store, restaurant, and supermarket subgroups (equivalent to an increase in mean hours of operation of about 4.75 hours) would lead to about a 6.8 percent increase in the annual average rate of real retail sales growth. Extending operating hours could lead to more robust competition, as the most inefficient and inadaptable retailers exit, new retailers enter, and successful retailers expand, as well as greater efficiency, increased economies of scale and scope, and expanded consumer access to retail goods and services. Balancing the benefits of extending opening hours with the concerns of interest groups requires the development of regulatory tools that foster a competitive environment while advancing public-policy objectives. Source: Dauda, Goodwin & Licetti (forthcoming). pharmacy with those of a convenience store, and the boost the average annual growth of retail sales by 6.8 viability of this model depends on the ability of outlets percent (Box 5). Subnational MCPAT Application to remain open 24 hours. Trucking services reform in Tabasco These reforms are associated with the growth of retail sales. Empirical estimates that control for Cargo transportation is vital to the development of time- and municipality-specific effects suggest local markets in Mexico, as it affects the input supply a significant correlation between reform easing of most local industries and connects production, restrictions on opening hours and the growth of distribution, and consumption within and between MEXICO retail sales. The reforms in Oaxaca are expected to Mexican states. Given Mexico’s geography and limited 51 rail network, road transportation (i.e., trucking) is the In general, the market for cargo transportation most common transportation method. Historically, is characterized by derived demand. Demand for Mexico’s state and municipal authorities have heavily transportation services directly reflects demand for regulated the trucking sector. These regulations were goods, and thus the size of the transportation-services originally predicated on the assumption that trucking market depends on the size of the market for the goods is a public service that affects the core interests of the to be transported. In regions with little production or state, and regulatory interventions in the trucking sector retail consumption, cargo transportation services will usually aim to control market variables such as market be limited. However, the efficiency of transportation entry, prices, and service quality. However, many state services also influences the price of the products and municipal regulations on trucking do not reflect being transported, and high transportation costs may market conditions, distort competition and create discourage the production of goods for distant markets perverse incentives, as COFECE and CONAMER have or reduce demand for inbound consumer goods. reported in analyses of several Mexican states.52 The power of subnational authorities to A COFECE market study focused on Sinaloa’s regulate trucking cargo-transportation sector highlighted several restrictions to competition and recommended State and municipal governments regulate major reforms to the regulatory regime, as transportation on state and municipal roads. State discussed above.53 Following this study and related and municipal roads include those located within a advocacy efforts, Sinaloa’s state government amended municipality’s borders and, in some cases, those that the regulatory regime to promote greater competition connect municipalities within the same state. However, in trucking services. Key reforms included replacing most municipalities are connected by federal roads. the concessions regime with a scheme in which all Because federal transportation permits tend to be firms interested in providing trucking services could easier to acquire than subnational permits, routes that participate.54 involve both federal and subnational roads are typically serviced by holders of a subnational transportation Key economic features of the cargo- permit. Consequently, the subnational regulatory transportation market regime primarily affects transportation services within or between municipalities of the same state. Different segments of the trucking sector have different technical and market characteristics. For There is no substitute for trucking in much of example, the nature of the products that need to be Mexico. Local routes between municipalities are seldom transported determines key service requirements— substitutable for rail or maritime transport, and even such as refrigerated containers for certain agricultural the transportation of goods by producers, wholesalers, products—and the distances involved determine or retailers themselves (rather than by third-party the modes of transport required. The WBG’s MCPAT trucking companies)56 requires a state-level permit. transportation and logistics module application Therefore, the Tabasco-specific market scenario reflects provides a detailed analysis of the different segments the assumption that commercial trucking has no near Subnational MCPAT Application of the trucking market and various forms of regulatory substitutes (Figure 20). intervention.55 52 COFECE has found significant barriers to competition in the cargo transportation sector in Nuevo León, Tlaxcala, and 17 other states. See COFECE (2016a) and COFECE (2017). 53 Ministry of Economy (2017); Mexicoxport (2017). 54 El Financiero (2017); State Government of Sinaloa (2017). MEXICO 55 Begazo et al. (forthcoming). 56 In Mexico, this is known as “private transport” (transporte privado). 52 Figure 20: Overview of the Trucking Industry in Tabasco State Roads/ Federal roads Municipal Roads Examples Eje troncal Transport only on federal roads: • Retail goods from ports, industrial parks to centers of Holders of federal permits distribution outside municipalities Transport only on state • Construction material from origin to construction site or from and municipal roads: construction site to dump. Holders of state-level • Agricultural produce or livestock from farm to market/ permits distribution point/processing facility. • Construction material from origin to construction site. • Agricultural produce or livestock from farm to market/ Transport on federal and subnational roads: Holders of state-level permits distribution point/processing facility. • Retail goods from ports, industrial parks, centers of distribution outside municipalities to final retail establishment/outlet. Source: Author’s elaboration. Note: This includes transport for third-parties and transport for own account (private), as for both activities, the state requires a permit. Transportation that originates and/or terminates agricultural sector may itself result from prohibitively on roads under subnational jurisdiction typically high transportation prices due to limited competition. falls into three categories. These include: (i) the Meanwhile, because Tabasco has numerous transportation of retail goods from ports, industrial parks, construction-material producers, the transportation of warehouses or other distribution centers outside the construction material is an important economic activity. municipality to the final retail outlet in the municipality, (ii) the transportation of agricultural produce or livestock The analysis considers demand for local road cargo from farms to marketing points, distribution centers, transportation of agricultural produce, construction or processing facilities, and (iii) the transportation of materials, and retail goods. Competition in these construction materials from their point of origin to subsectors is typically viable, as economies of scale in the construction site or from the construction site these segments do no generate a significant degree to the dump. Smaller-scale, less-frequent forms of of market power nor create a natural monopoly, and a transportation may include moving furniture or other market equilibrium with multiple competing operators larger household items. is generally economically efficient. However, specific types of trucking services may be subject to market Because the commercial transportation sector is Subnational MCPAT Application failures that justify government intervention, and like driven by derived demand, the composition of the other types of transportation, trucking creates negative state economy influences the size and development externalities such as pollution, congestion, and safety of the trucking industry. For example, because risks. The government may therefore establish certain agricultural production in Tabasco has significantly behavioral and material standards for vehicles and declined, there is little demand for the transportation service providers. of agricultural produce. However, the decline in the MEXICO 53 Reform scenarios in Tabasco and their and the concessionaire fleets are old and do not meet effect57 the capacity requirements and technical standards demanded by clients. Located in southeastern Mexico, Tabasco is favorably positioned to serve as an overland Although the regulatory model created a series logistics hub, particularly for the Yucatan peninsula. of local monopolies in trucking services, the The state produces significant quantities of petroleum state authorities did not effectively supervise and natural gas, it has a large mining sector, and it concessionaires, maintain service-quality standards, produces construction materials demanded within or authorize new concessions when demand Tabasco and by neighboring states. These economic conditions warranted an increase in supply. For this characteristics highlight the importance of an efficient regulatory model to function, the state government trucking industry. would have to closely supervise the cargo-transportation union and ensure that the supply and quality of trucking The 2014 Transportation Law establishes the services were adequate to meet demand. The authorities regulatory framework for providing transportation would also have to ensure that trucking services were services in Tabasco State.58 The law provides for provided only by authorized concessionaires. In practice, two types of cargo services: (i) the transportation of however, the state government did not meaningfully goods and merchandise and (ii) the transportation of supervise these aspects of the trucking industry. In some construction materials. In both cases, the regulatory cases, the union unjustifiably refused to render services framework grants exclusive rights to transportation and faced no sanctions from the authorities. Moreover, concessionaires to provide these services within their the administratively determined trucking rates far respective concession areas. Thus, each municipality in exceeded a competitive equilibrium, generating a price Tabasco has one transportation union that exclusively distortion that negatively affected consumers. provides transportation services. New concessions are granted at the discretion of the state authorities, These restrictions caused significant inefficiencies which must declare “the necessity of the service” based not only in the cargo transportation sector, but also on studies of supply and demand. Private firms are in sectors dependent on it, with especially negative not allowed to apply for new concessions outside this impacts on small firms and entrepreneurs. Because context. Finally, the law permits firms to transport their they are protected from competition, concessionaires own goods, but only so long as doing so is not deemed have no incentive to improve service quality or invest to be “in conflict” with the exclusive rights granted to in their vehicle fleet. Price is an especially important concessionaires. variable in the trucking industry, as it affects the availability of services, the number of trips required, In both segments of the trucking industry, the and the efficiency of transport logistics. Because prices regulatory framework diverged from the reality of were set administratively and did not reflect market the market. The services provided by concessionaires conditions, efficiency incentives were largely nullified. were not capable of meeting demand, and other actors The transportation of construction materials is an Subnational MCPAT Application covered the shortfall. The Tabasco trucking industry has been growing more slowly than the national average, especially important economic activity in the State 57 Under the Agreement of Technical Cooperation between the Ministry of Economic Development and Tourism of the State of Tabasco and the World Bank, signed on February 19, 2014, the World Bank and CONAMER carried out an analysis of state and municipal regulations to identify opportunities to improve competition and promote private investment in key sectors of the State of Tabasco. One of these sectors was cargo transportation. 58 According to Article 8 of the Transportation Law of Tabasco, the provision of public transportation services is under the purview of the state’s executive branch. Individuals and firms have no preexisting right to provide transportation services, except as authorized by MEXICO concessions and permits. Concessions are granted within the territory of each municipality, and only carriers that are members of the municipal union are eligible to receive them. 54 of Tabasco. The transportation union with the largest tightened control over unauthorized suppliers, the number of concessions for this service in Tabasco had union would not be able to meet the demand for the 253 vehicles, and its annual turnover was approximately transportation of construction materials. MXN 10 million (roughly US$530,000). The public sector was the primary source of demand for the transportation Following this analysis, the WBG team estimated of construction materials. that transportation concessionaires were unable to service 75 percent of the total volume of cargo As with goods and merchandise, demand for the transportation in the State of Tabasco. The team transport of construction materials could not be prioritized the construction-materials subsector satisfied by the concessionaires. This problem could due to its economic importance to Tabasco State. be mitigated by construction companies transporting Moreover, inefficient outcomes in this market segment materials themselves, but many lack the capital to invest adversely affects other key economic activities, such as in their own vehicle fleets. Small firms have especially construction, and impacts both the private and public limited options in this regard, and the high prices sectors. charged by transportation companies constrain the growth of their businesses. Moreover, the transportation To preempt political-economy challenges, the team authorities have repeatedly denied self-transportation identified and interviewed a large set of relevant permits on the grounds that they infringed on the rights stakeholders. The World Bank and CONAMER teams of unions. spent several weeks interviewing representatives from a majority of transportation unions in the State of Tabasco, Furthermore, even construction companies that including those that were more economically viable obtained permits for self-transportation and and those which were so inefficient that most members utilized their own vehicles were still forced to use had already turned to other economic activities. These union services. In several cases, the unions physically interviews gave a more complete picture of various blocked the trucks of construction companies that stakeholders’ economic interests and informed the were loading construction materials from suppliers recommendations for sequencing pro-competition and demanded a portion of the load. In those cases, reforms. The teams also engaged with associations of the transportation authorities acted as mediator but construction companies, the main stakeholders affected effectively sided with the unions, asking both parties to by suboptimal cargo transportation in Tabasco, and share the load. However, because the union fleet was learned about the potential economic gains generated often not suitable to transport the required construction by more competitive cargo rates. materials, in several cases the construction companies paid a “fee” to the unions, even though they were using The reform program’s alignment with the strategic their own fleets. On the other hand, the unions report objectives of the state government increased buy-in. the authorities do not adequately enforce the rights of The WBG team presented the findings of the study to the concessionaires, exposing them to “unfair competition.”59 Governor of Tabasco, who instructed that the World Bank, CONAMER, and state government officials, including the High prices and low service quality prompted many Secretary of Transportation, propose a joint action plan Subnational MCPAT Application construction firms to employ informal service for implementing gradual pro-competition reforms in providers. Construction firms and other users preferred the construction-materials transportation subsector. The using informal alternatives to the unions due to their Governor and other state officials were motivated by the lower prices, which were well below the administratively finding that trucking reforms could improve the state’s determined rate, and the higher quality of their vehicle competitive position, especially in the context of recent fleets. Both factors suggest that even if the authorities federal energy reforms, which could attract significant MEXICO 59 The information in this paragraph is based on interviews with stakeholders in Tabasco conducted by the WBG team. 55 Box 6 The pro-competition reforms in Mexico’s national trucking sector Pre-reform context Prior to 1989, trucking on federal highways in Mexico was subject to a rigid regulation and substantial government interference, which created a highly inefficient system that did not allow companies to compete with one another on price or service quality. The regulatory framework had been established in 1977 by the Ministry of Communication and Transport (Secretaría de Comunicaciones y Transportes, SCT) and was intended to protecting transportation infrastructure and provide more reliable services, as it was believed that open competition might increase price volatility and encourage trucking companies to engage in dangerous cost-cutting practices. The pre-reform environment imposed numerous barriers to market access, especially the requirement to obtain a federal trucking concession from the SCT to provide general freight services in one of the country’s 11 national transit corridors. Truckers were also obliged to load and unload cargo at specified freight centers, and shippers had to channel requests through these centers, which constrained entry and fostered the formation of cargo-assignment cartels. Official trucking tariffs were set by the SCT and did not reflect costs, as they were unresponsive to supply and demand conditions. The cartelization encouraged by government restrictions weakened efficiency incentives, imposing costs on industries and sectors across the economy. In this context, the government formulated a new policy framework to deregulate the trucking industry. The trucking deregulation program, launched in 1989, was undertaken within the framework of a general macroeconomic reform that followed the debt crisis, and not as an isolated action. Stages of the reform process Having observed the success of deregulatory reform in the United States, the Ministry of Finance (Secretaría de Hacienda y Crédito Público) and the Ministry of Commerce and Industrial Development (Secretaría de Comercio y Fomento Industrial) began deregulating the trucking industry through a three- stage process. The first stage was to request support from the affected industry associations, emphasizing modernization rather than deregulation and not openly mentioning increased competition as an objective. This approach enabled the government to negotiate a collaboration agreement with the national trucking association (Cámara Nacional de Autotransporte de Carga, CANACAR). The second stage consisted of approving the new regulations, which eliminated most restrictions, and debunking the idea that a tightly regulated trucking industry was consistent with the public interest. Finally, the third stage involved abandoning price ceilings, which allowed rates to be freely negotiated between truckers and customers, and replacing the concession system with a permit system over which the federal authorities no longer exercised any discretion. Following the reform, previously favored market participants attempted to replace government control with interfirm agreements. This was confirmed by an ex officio investigation carried out by the Mexican Federal Competition Commission (Comisión Federal de Competencia), which discovered a price-fixing agreement among members of CANACAR. The agreement was deemed to be a violation of the competition law, and CANACAR was punished with a fine. Subnational MCPAT Application Results of the reform The results of the reform were overwhelmingly positive. The entry of new firms, the expansion of existing firms, and the legal registration of a number of formerly unregistered firms led to a dramatic 125 percent increase in haulage units. The intensity of competition dramatically increased, and prices fell as output rose. Moreover, the reform fostered greater economy-wide innovation and growth, prompting a sharp decrease in delivery times and transit loses due to better logistics quality and giving consumers access to new products by direct delivery, which had previously been unavailable due to inflexible transportation services. MEXICO Source: Dutz, Hayri and Ibarra (1999). 56 Figure 21: A proposed action plan for pro-competition reform in the cargo-transportation sector Formalization and Intensive cargo Awareness Adaptation of Proving the need Granting Comprehensive facilitation of transport inspection campaign for rights tariff schemes for the service, additional Transport Law private transport campaign and responsibilities based on technical permits for cargo reform through a new under Tabasco findings and construction permit expedition Transport Law and material transport policy. Antitrust Law (valid for 5 years) investment. In addition, the WBG team estimated that firms to transport their own goods and supplies, which more efficient cargo transportation system reduce road- would require no change in any legal instrument. To construction costs by as much as 15 percent. address concessionaires’ claims regarding unauthorized transportation services, the authorities could commit Nevertheless, the reform process was expected to to tighter enforcement of the law. A campaign to raise be a politically sensitive undertaking. In Tabasco, as public awareness of the provisions of the Transport in many other Mexican states, the cargo-transportation Law and the Federal Antitrust Law could help prevent sector involves a large share of unskilled workers, illegal collusive agreements on among concessionaires. including truckers employed by firms and self-employed Shifting from the current system of fixed rates to a truckers (hombre-camión). A reform process would rate band, with the current rates set as the maximum, rearrange the sector, potentially disrupting the income could allow current concessionaires greater flexibility stream of workers who may have difficulty finding to attract customers by charging lower rates (e.g., alternative employment. Moreover, many local cargo- through discounts and temporary promotions). Once transportation industries are dominated by powerful these preliminary administrative reforms have been unions with significant political influence. completed, the authorities could move forward with the legislative elements of the reform process (Figure 21 and However, the highly positive spillover effects Annex III). of a more efficient transportation sector could help the government leverage multi-stakeholder engagement to overcome the political clout of concentrated interest groups. A carefully designed action plan was vital to the success of the proposed reforms, and Mexico’s experience with similar pro- competition reforms at the federal level could serve as a blueprint. Indeed, many of the market features that Subnational MCPAT Application prevailed in Tabasco’s trucking industry were also found in other Mexican states (Box 6). Policymakers in Tabasco State could successfully reform the cargo-transportation sector by implementing politically feasible measures that will have a meaningful impact on competition. The state MEXICO government could begin by issuing more permits for 57 MEXICO 58 Subnational MCPAT Application Conclusion 6 P roductivity growth is among Mexico’s most 32 federative entities. In total, 520 restrictive regulatory pressing macroeconomic challenges, and provisions have already been identified, most in the increased competition can catalyze firm- retail, construction, and manufacturing sectors. level efficiency improvements, facilitate the growth of more-efficient firms, and yield substantial welfare The reform process in Tabasco and Oaxaca gains. Mexico’s national productivity growth rate is low, underscore the value of identifying inherent market and southern states tend to perform especially poorly. features that may be exacerbated by regulation Competition can boost productivity in lagging states and designing measures that carefully balance by promoting a more efficient allocation of resources, political feasibility with local economic impact. In and it can both increase the quality and lower the prices Oaxaca, amending retail bylaws to loosen restrictions on of consumer goods and services. The resulting welfare operating hours attracted new investment and boosted gains can have a highly positive impact on lower-income sales. The reforms advanced the state’s objectives of households. Conversely, uncompetitive markets cost the increasing competitiveness and addressing poverty, poorest households an estimated 20 percent more than which helped build the political will necessary to the richest60. overcome opposition from vested interests. In Tabasco, the reform strategy was designed with the support of COFECE and CONAMER are well positioned to the state’s Governor and precisely targeted the market address regulatory restrictions to competition at segments where restrictive regulations created a critical the subnational level. State and local government bottleneck for the local economy. interventions distort competition in key sectors such as transportation, retail, construction, and agriculture. Further reforms to boost competition in priority COFECE can advocate for pro-competition reforms, sectors are currently being prepared. Upon while CONAMER can build on its institutional network completing the Justicia Cotidiana program in mid- to expand the regulatory-improvement agenda to 2018, CONAMER will have delivered detailed reform encompass barriers that affect specific markets and memoranda to 32 federative entities. In Campeche, market dynamics. Querétaro Guanajuato, Baja California Sur, Chihuahua, Colima, and Sonora, state authorities have already The WBG’s subnational MCPAT was designed to initiated the legislative process to modify the regulatory Subnational MCPAT Application address a critical gap in competition reform that framework in line with the recommended reforms. could unlock key markets for local development. CONAMER continuously monitors reform progress The application of the MCPAT to Oaxaca in the pilot and highlights exemplary initiatives during their well- phase, and then upon request to Tabasco and the State publicized and politically significant Annual National of Mexico in partnership with CONAMER, provided a Regulatory Improvement Conference. solid foundation for CONAMER to expand the tool to all MEXICO 60 Urzúa (2013). 59 Building on the MCPAT assessments, the government recently passed a new law expanding CONAMER’s regulatory improvement program for state and municipal governments. The 2018 General Law on Regulatory Improvement (Ley General de Mejora Regulatoria) requires CONAMER to implement a reform program targeting priority sectors, continuing the work launched by CONAMER and the WBG under Justicia Cotidiana. This program, inspired by the MCPAT, will transform subnational regulatory pro-competition reform from an individual initiative to a formal public policy. The law requires subnational governments to undertake an ex ante RIA that includes a competition assessment, and the MCPAT checklist could inform this assessment as well. The MCPAT analysis and subsequent reform experience can provide a platform for knowledge exchange and increase reform momentum. The data generated by CONAMER on the regulatory framework for priority sectors with help of the MCPAT, and the experience gleaned from the reform process to date, can complement the new mandate for subnational regulatory improvement. A more systematic empirical assessment and impact evaluation could also inform a national strategy to promote reforms in several states simultaneously. COFECE will continue to take determined action against anticompetitive practices and investigate regulatory provisions that may create barriers to entry or facilitate cartels, both of which can provide a powerful incentive for subnational governments to voluntarily remove of anticompetitive restrictions. 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World Bank (forthcoming) “Systematic Country Diagnostic.” Washington, D.C.: World Bank Group. Subnational MCPAT Application MEXICO 63 Annexes MEXICO 65 Subnational MCPAT Application Annex I. Institutional Mandates for Regulatory Reform COFECE has institutional powers to investigate have a positive effect on competition that outweighs and determine essential inputs or barriers to their anticompetitive effects. When COFECE rules that competition.61 Under the new legal regime, the barriers to competition exist, the authorities in charge Mexican federal law on economic competition provides of regulating the relevant sector must be notified of the a special procedure for detecting and declaring barriers decision so that they can determine an effective strategy to competition and essential inputs. COFECE can for increasing competition. initiate this process, either ex officio or at the request of the Federal Executive, when there is evidence of In March 2018, the Chamber of Deputies of Mexico a lack of effective competition in a given market. If, approved the initiative presented by CONAMER upon completion of the investigation, the investigating to enact a New Mexican Regulatory Improvement authority determines that there is a lack of effective Law. President Peña Nieto signed the law into effect competition in the investigated market, the authority in May 2018. The new law is designed to promote shall issue a preliminary opinion within sixty days (60). the improvement of the regulatory framework at the Otherwise, the authority must propose that the plenary federal, state and municipal levels, and it will introduce a close the file. The authority must issue a resolution, subnational regulatory impact analysis (RIA). which may include: The new RIA must be applied to all regulatory a) Recommendations to public authorities to proposals at the federal and subnational levels. eliminate regulatory barriers to entry or to take Regulatory-improvement agencies will be set up at the regulatory action within the scope of their legal subnational level, and all government agencies will be competence to promote more competition required to conduct RIAs before enacting regulations. in the investigated market. The decisions and Under the law, the process of design regulations, recommendations should be publicized; regulatory proposals, and their corresponding RIAs b) An order to the corresponding economic agent should focus primarily on ensuring that regulations are to eliminate a barrier that unduly affects competition consistent with economic competition. In addition, the in the investigated market; or RIAs will establish a structured analytical framework c) The divestiture of assets, rights, or social to help government agencies at all levels study the parties, or compulsory action by the economic effects of the regulations and regulatory proposals, in agent, necessary to effectively eliminate barriers consultation with the public. The new law also requires Subnational MCPAT Application to competition, though only when other corrective that government authorities at all levels adopt schemes measures are not sufficient to solve the identified for revising their regulatory proposals through RIAs. To competition problem. improve existing regulations, regulatory-improvement agencies may request that other government In all cases, COFECE must verify that the proposed agencies carry out ex post RIAs, and they may propose corrective measures will increase market efficiency. recommendations for amending the current regulatory Therefore, no corrective measures will be taken when framework. MEXICO barriers to competition generate efficiency gains or 61 Articles 94 to 96 of the Mexican Federal Law on Economic Competition. 66 Annex II. Regulatory Restrictiveness in Oaxaca, Tabasco, and Mexico State Figure A2.1. Tabasco: Anticompetitive Regulations in the Transportation Sector Type of regulatory barriers to competition Type of regulatory barriers to competition (By number of regulations) (By degree of restrictiveness from 20 6 0 to 6, 6 being most restrictive) 18 16 5 14 Number of restrictions 4 12 3.27 10 8 3 2.16 2.25 8 6 6 6 2 4 1 2 0 0 Rules that Rules that are conducive Rules that Rules that Rules that are conducive Rules that reinforce dominance to collusive outcomes discriminate and reinforce dominance to collusive outcomes discriminate and or limit entry or increase costs to protect vested interests or limit entry or increase costs to protect vested interests compete in the market compete in the market Tabasco Max Note: This graph reflects all potential regulations that restrict competition (e.g., granting of Note: This graph is based on the same list of regulations as the one on the left. However, within temporary exclusivity) and classifies them into general and specific categories. In the category each category, those restrictions on competition that are more restrictive to competition have "Rules that reinforce dominant positions or limit entry", there are 18 types of restrictive been identified (e.g., absolute barriers to entry versus relative barriers) and have been weighted regulations in the transportation sector ("max"). Of these 18, 8 have been found in Tabasco. twice as much as those that are less restrictive. The sum of the weighted restrictions is normalized Source: Authors’ elaboration based on information provided by Tabasco’s Secretary of Economic to a value of 0 to 6. Although Tabasco imposes more restrictions on the number of companies, Development. regulatory barriers in the category "Rules that discriminate and protect vested interests" are the most restrictive. Source: Authors’ elaboration based on information provided by Tabasco’s Secretary of Economic Development. Subnational MCPAT Application MEXICO 67 Figure A2.2. Mexico State: Anticompetitive Regulations in the Retail Rector Type of regulatory barriers to competition Type of regulatory barriers to competition (By number of regulations) (By degree of restrictiveness 6 from 0 to 6, 6 being most restrictive) 20 18 16 5 Number of restrictions 14 4 12 10 3 8 6 5 2 1.5 1.15 4 3 0.63 2 1 2 0 0 Rules that Rules that are conducive Rules that Rules that Rules that are conducive Rules that reinforce dominance to collusive outcomes discriminate and reinforce dominance to collusive outcomes discriminate and or limit entry or increase costs to protect vested interests or limit entry or increase costs to protect vested interests compete in the market compete in the market Edomex Max Note: This graph reflects all potential regulations that restrict competition (e.g., granting of Note: This graph is based on the same list of regulations as the one on the left. However, within temporary exclusivity) and classifies them into general and specific categories. In the category each category, those restrictions on competition that are more restrictive to competition have "Rules that reinforce dominant positions or limit entry", there are 19 types of restrictive been identified (e.g., absolute barriers to entry versus relative barriers) and have been weighted regulations in the transportation sector ("max"). Of these 19, 5 have been found in Mexico State. twice as much as those that are less restrictive. The sum of the weighted restrictions is normalized Source: Authors’ elaboration based on the information provided by Mexico State’s Secretary of to a value of 0 to 6. Although Mexico State imposes more restrictions on the number of Economic Development. companies, regulatory barriers in the category " Rules that discriminate and protect vested interests " are the most restrictive. Source: Authors’ elaboration based on the information provided by Mexico State’s Secretary of Economic Development. Figure A2.3. Oaxaca: Anticompetitive Regulations in the Retail Sector Type of regulatory barriers to competition Type of regulatory barriers to competition (By number of regulations) (By degree of restrictiveness 6 from 0 to 6, 6 being most restrictive) 25 20 5 Number of restrictions 4 15 10 3 2.32 10 2 1.18 5 4 4 0.73 1 0 0 Rules that Rules that are conducive Rules that Rules that Rules that are conducive Rules that reinforce dominance to collusive outcomes discriminate and reinforce dominance to collusive outcomes discriminate and or limit entry or increase costs to protect vested interests or limit entry or increase costs to protect vested interests Subnational MCPAT Application compete in the market compete in the market Oaxaca Max Note: This graph reflects all potential regulations that restrict competition (e.g., granting of Note: This graph is based on the same list of regulations as the one on the left. However, within temporary exclusivity) and classifies them into general and specific categories. In the category each category, those restrictions on competition that are more restrictive to competition have "Rules that reinforce dominant positions or limit entry", there are 18 types of restrictive been identified (e.g., absolute barriers to entry versus relative barriers) and have been weighted regulations in the transportation sector ("max"). Of these 18, 10 have been found in Oaxaca. twice as much as those that are less restrictive. The sum of the weighted restrictions is normalized Source: Authors’ elaboration based on the information provided by Oaxaca’s Secretary of to a value of 0 to 6. Although Oaxaca imposes an equal number of restrictions that facilitate Economic Development. collusion and that discriminate, regulatory barriers in the category "Rules that discriminate and protect vested interests" are the most restrictive. Source: Authors’ elaboration based on the information provided by Oaxaca’s Secretary of Economic Development. MEXICO 68 Annex III. The Action Plan for Reforming Cargo Transportation in Tabasco State The details of the reform action plan agreed to with with the necessary permits and concessions, the Governor of Tabasco State includes: the supervision campaign will enforce quality, environmental and security requirements.63 (i) The formalization and facilitation of self- (iii) An awareness campaign regarding rights and transportation and the implementation responsibilities under the Transport Law and of an expedited process for granting self- the Federal Antitrust Law. This will ensure that transportation permits. This will create concessionaires do not engage in illegal practices opportunities for entrepreneurs in Tabasco whose when coordinating their economic decisions and transportation needs are not met by the current it will allow individual dealers who wish to offer operators (unions) by enabling them to satisfy higher-quality services to contract individually with their own demand for transportation services clients and thus expand their businesses. This activity with their own assets and their own capital. 62 will also increase the level of predictability of the Expanded transportation options will promote operators in the market, who can now learn more entrepreneurship and encourage investment in about their rights and obligations and thus ensure Tabasco. compliance with applicable laws. This measure will (ii) An intensive cargo-transportation supervision contribute to the regularization of the market64. campaign. This will deter illegal practices such as (iv) The adaptation of tariff schemes to a rate band, providing unauthorized transportation services, with the currents rates set as a maximum. This or providing public transportation services using will allow current concessionaries greater flexibility private transportation permits, while ensuring that to offer services at better prices by allowing them to the rights granted to private permit holders are offer temporary discounts and promotions within protected and that the current policy scheme is the established rate band. Greater price flexibility will not affected. In addition to enforcing compliance not only strengthen entrepreneurial freedom, but 62 Within this stage, two main actions were proposed: (i) The transportation authority will clarify that the issuance of self-transport services do not affect the rights of the current concessionaires. It will also clarify that the scope of self-transport permits covers the only the activity of transporting goods for satisfying their own needs without offering them to the public, so there will not any interference with the right of the unions; (ii) The transportation authority will grant self- transport permits within 3 working days, after which, if no reply were received, it would be deemed to have been granted. It was suggested that the circular clarifying the aforementioned provisions be published in the official newspaper and in the different government websites. Additionally, the SCT will inform the mainstream media with a press release. 63 The main activity proposed within this stage was the launching of a campaign for combating informality and guaranteeing security Subnational MCPAT Application in the provision of the service, in coordination with the concessionaires and other interested parties in the cargo transport sector. This campaign will focus on compliance with the appropriate permits and / or concessions as well as the rights granted in each case (for example, preventing private transport permit holders from providing services to third parties). The mainstream media will be informed about the campaign with a press release that will detail the sanctioning measures applicable under the Regulation. 64 One of the findings was that the unions operate as a single decision unit, instead of individual dealers acting as competitors among themselves. Throughout all the 32 federal entities, the federal authorities of economic competition have already detected 9 incidences of illegal and anticompetitive practices in the cargo transport sector. The mains activity proposed under this stage was to launch an informative seminar –with the participation of officials from both the Federal Commission of Economic Competition (COFECE) and the Secretariat of Transport of the State of Tabasco– where the main provisions of the Mexican Antitrust Law will be presented, specifically in relation to the coordination between Competitive Economic MEXICO Agents.(explaining that contracts, agreements, arrangements or combinations between individuals – each being individually concessionaries of public transport and competing Economic Agents– is an infraction to the Antitrust Law. 69 will also benefit consumers of transportation services cargo and construction materials transportation; (b) for cargo and construction materials, including small establish that this authorization would be granted companies engaged in construction or commerce.65 at the initiative of the private sector following an (v) A declaration of the need for the service based evaluation of objective characteristics that promote on technical findings. As mentioned above, traffic safety and environmental protection; (c) under the current regime, the necessity of the eliminate the requirement to prove the need for new service must be proven in order for the state to services; (d) establish that transportation service grant new concessions. Thus, this declaration will prices will be determined by the market; and (e) allow the expansion of the supply of public cargo eliminate the need for private cargo transportation and construction material transportation, which permits. has lagged the growth of demand.66 This action will also be the first step towards regularizing the unauthorized transportation services that currently satisfy the excess demand (for example, transportation via 32m3 gondolas). Recognizing the need for service will allow all market players to compete on a level playing field. (vi) The granting of additional permits valid for five years. This will allow authorized public transportation services providers to meet the excess demand. Although some large operators in the State of Tabasco with sufficient resources to acquire capital will begin offering private transportation service, many smaller firms will benefit from additional public transportation service providers. Finally, these measures will guarantee that all providers of public transportation services for cargo and construction materials compete on equal terms.67 (vii) A comprehensive reform of the Transportation Law. The authorities will prepare a draft amendment to the Transportation Law of the State of Tabasco based on recommendations from the World Bank Group and CONAMER. The reformed law will include, inter alia, provisions to: (a) replace the concession scheme with a single authorization scheme valid throughout the state and covering all types of Subnational MCPAT Application 65 It was proposed that concessionaires and permit holders were allowed to charge a fee which does not exceed the maximum nor the minimum limits defined by the transportation authority (which will be aligned with the minimum cost of an efficient unit). Nominally, the pre-existing rights of the concessionaires are not affected because they can continue to charge the maximum rate (the maximum limit is not reduced and it could even be increased); nevertheless, they are free to charge an even lower rate. 66 It was proposed that a statement of need will be issued based on the results of the technical studies carried out by the authority, based on these main findings: (i) The volume of material for annual extraction authorized by exceeds the capacity of the vehicles granted by 14 times. That is, demand exceeds supply, even without considering other sources of construction material unaccounted for due to the sedimentation and dragging of rivers and streams. Even in relation to other states in Mexico of similar GDP, the size of the vehicle fleet in Tabasco is still small. 67 A call will be issued for a specific number of permits for public transport of cargo and construction materials based on the declaration of MEXICO need, in the terms established by Law and Regulations and addressed to all potential interested parties, including concessionaires and permit holders that are providing the service. This will be published in the Official Gazette and in the media. 70