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Cablegate: Calderon Staffers On Economic Policy Issues

VZCZCXRO7425
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5148/01 2542138
ZNR UUUUU ZZH
P 112138Z SEP 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 3158
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 005148

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EB/ESC
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND SLADISLAW
DOC FOR ITA/TD/ENERGY DIVISION
DOC FOR4320/ITA/MAC/WH/ONAFTA/ARUDMAN
TREASURY FOR IA (JASPER HOEK)

E.O. 12958: N/A
TAGS: ECON ENRG EPET MX
SUBJECT: CALDERON STAFFERS ON ECONOMIC POLICY ISSUES

REF: A. MEXICO 3609

B. MEXICO 1492
C. MEXICO 1174

Sensitive but unclassified, entire text.

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Summary
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1. (SBU) In a September 7 session with Dr. Sidney Weintraub
of CSIS, President-elect Calderon's transition team member
Dionisio Perez Jacome (former head of Mexico's Energy
Regulatory Commission (CRE)) and former Mexican Energy
Secretary and Calderon advisor Luis Tellez described current

SIPDIS
Calderon transition team efforts to find high impact projects
to win over the majority of voters, especially those in the
Party of the Democratic Revolution (PRD), that did not vote
for Calderon. This social agenda would control the early
days of the Calderon presidency. Even over the long term,
Perez and Tellez said the Calderon administration would move
slowly on difficult fiscal, energy and labor reforms. Tellez
told us that the Calderon administration would work with all
affected government departments on policy initiatives rather
than follow what he termed President Fox's "uncoordinated"
approach. End Summary.

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Setting
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2. (SBU) Econoff joined CSIS Dr. Sidney Weintraub's
September 7 meetings with President-elect Calderon transition
team member Dionisio Perez Jacome (former head of Mexico's
Energy Regulatory Commission (CRE)) and Luis Tellez (former
Energy Secretary to President Zedillo). Perez said he would
be working on economic policy in the transition team
including Energy, Telecom, Investment Promotion, Fiscal
Reform, and Agriculture and Fisheries. Calderon's plan for
the Sexenio (his term) would be ambitious. Tellez added that
the real challenge would be in getting PRD supporters to
understand that Calderon sought to take care of them. The
transition team was looking for high impact social programs
that could be done for relatively little political capital,
while significant reform projects requiring more political
heavy lifting would be deferred to later in the term. The
Calderon team was continuing to list potential high impact
social projects.

----------------------------------------
High Impact Projects to Benefit the Poor
----------------------------------------

3. (SBU) The central theme of Calderon's election campaign
was employment. According to Perez, the Calderon
administration would not change that focus. To create jobs,
Mexico needed more investment in infrastructure and to
promote measures that improved its competitiveness.
Additional progress was needed on rule of law issues.
According to Perez, Calderon would be using the 100 projects
proposal he published in the closing weeks of the campaign
(ref. A) as a guide to his work plan in the first 100 days,
though he would not seek to implement all provisions of all
proposals in that document. For example, Perez believed that
Calderon would move forward with the "Oportunidad EnergQtica"
proposal to subsidize gas and electricity process for poor
Mexicans. On the fiscal side, he would not be able to
institute a flat tax in the short or medium term, but could
introduce some regulatory or administrative changes to pave
the way for its introduction. Of the 100 actions in the
document, 30-35 could be done through amendments of existing
laws or through administrative action, but the team would
have to "find an equilibrium" between the depth of
congressional involvement required and what could be
accomplished realistically. Perez divided the issues with
one-third being economic, a third social and the remainder
"political."

4. (SBU) To benefit Mexico's poorer South, Calderon would
propose specific work on education and health targeted to the
region. He will also propose an extensive series of
infrastructure improvements, particularly highways focused in
the area. The largest project would be to readdress the

MEXICO 00005148 002 OF 003


decision of the federal competition commission to stop the
merger between Ferromex, which operates railroads in Northern
Mexico and Ferrosur which operates railroads in the south and
to allow the companies to cooperate on construction of a two
track rail line across the Isthmus of Tehuantepec from Salina
Cruz on the Pacific to Coatzacoalcos on the Gulf of Mexico to
compete with the Panama Canal. Calderon also plans programs
for small and medium sized businesses including a measure
that would harmonize many government requirements. His
programs would also give support to fisheries and tourism
development.

-------------------
Longer term reforms
-------------------

5. (SBU) Perez and Tellez agreed that in the longer term,
energy, fiscal and labor reforms were essential. On both the
energy and social agendas was "Oportunidad EnergQtica," a
proposal to replace the current system of gas and electricity
subsidies for all users. Also on the energy side, the
Calderon administration would continue to press for the Pemex
corporate governance reform started during the Fox
administration (ref. B). He said strengthening the role of
the CRE would also be important. They would be looking at
electricity and natural gas tariffs to develop more flexible
options. Luis Tellez added that the first steps to
addressing the energy situation would have to be made in
"feasible" areas like administering and strengthening the
CRE. Tellez added personally that the GOM would have to find
some way to better allocate risk between Pemex and its
contractors in order to provide the contractors with more
"upside" potential (i.e. beyond the current "Multiple Service
Contract" model for partnership with outsiders) (ref. C).
Perez noted that his personal project would be to allow
companies controlled by Mexican States to operate those oil
fields that are no longer profitable for Pemex.

6. (SBU) On taxation, Perez said he would be working to
press forward on the flat tax rate that Calderon had raised
during the campaign. This would be a gradual process both
dropping rates and eliminating deductions. Perez admitted it
would be difficult to maintain Congressional support. The
Calderon team's initial thoughts towards eliminating the
inherent regressive nature of a flat tax would be to exempt
from taxation an amount of income five times the minimum
wage. He noted that the flat tax effort was already facing
opposition from Mexican accounting and law firms that stood
to lose business. As part of Calderon's efforts to win over
supporters, Perez suggested that Calderon would start during
the first 100 days with proposals to allow families to file
returns rather than individuals only, as is currently done;
sending taxpayers partially filled out tax forms; and finding
some way to reward Mexicans that have consistently paid
taxes.

7. (SBU) On labor, additional flexibility was necessary,
although Calderon had assigned labor to the "Political" side
of the transition effort. Perez said he believed that
Calderon would have to develop incentives to move workers
away from the informal sector. He added that current Fox
Administration programs like "Seguro Popular," which offered
state health benefits to Mexicans de-linked to their
employment status actually encouraged participation in the
informal sector. Calderon's labor reforms would be linked to
fiscal reforms. Tellez added that the problems facing Mexico
were not so much the unions, but specifically the
public-sector unions. Private corporations like Daimler
Chrysler and Ford continued to make billions of dollars in
investments in the country while negotiating sufficiently
flexible labor contracts. The problem was more a lack of
government will. Tellez said that the Fox administration had
caved completely to union demands. The Mexico City power
company, Luz y Fuerza del Centro (LyFC), was perhaps the
worst offender with a labor contracts first negotiated in
1905. The company now loses $2.5 billion per year with
"non-technical" electricity losses of 32% , with the
company's union in charge of billing.

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Calderon will be different on Economic Policy
---------------------------------------------


MEXICO 00005148 003 OF 003


8. (SBU) Tellez noted that the Salinas and Zedillo
administrations were different from Fox's government. Under
the previous Presidents, all economic decisions were taken in
formal Cabinet sessions, but Fox has held few meetings. As a
result, the economic decisions that affect several ministries
at once, like those on infrastructure, frequently run into
difficulties. Without coordination, Hacienda frequently is
forced to speak out publicly as it did recently on a Fox
proposal to construct a bullet train from Mexico City to
Guadalajara. Tellez stressed that Calderon would not follow
the Fox model.


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