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Is the Game Over for Mexico's Monopolies?

It doesn't take long for a visitor to Mexico to learn what it's like to live in a land of monopolies and duopolies. At the Mexico City airport, passengers needing assistance must hire a porter whose union has exclusive rights to the facility—there are no self-service luggage carts. At drugstores, prices are higher than they should be, because just two pharmaceutical distributors control 80% of the market.

A request for a Pepsi (PEP) at lunch may be greeted with the response that Coca-Cola (KO) has an exclusive agreement with the restaurant. And don't bother shopping for the best price at the pump: Only Pemex, the state oil monopoly, is allowed to put its brand name on service stations, whose price per gallon is fixed by the government.

Biggest of all the monopolies is Telmex (TMX), the telco giant that still controls 94% of Mexico's phone lines. Multinationals such as AT&T (T), which has a joint venture to provide long-distance and corporate telecom services in Mexico, have long complained that Telmex blocks competition. Local companies have made the same complaint. "The government has to give a chance to the competition to grow," says Carlos Montemayor, director of Marcatel, a long-distance operator based in Monterrey.

Both multinational and homegrown companies say that while Mexico has one of Latin America's most open economies, its tenacious monopolies and weak regulation reduce consumer choice and boost the cost of doing business. "Sometimes it seems like this country was purposely designed with obstacles to competition every step of the way," says Eduardo Pérez Motta, head of the government's anti-monopoly agency, the Federal Competition Commission (CFC) (see BusinessWeek.comA Talk with Mexico's Competition Czar.

TAKING ON SLIM. If Pérez Motta has his way, that will soon change. For years, regulators have tried to rein in some of the worst anti-competitive practices but had few tools to force powerful businesses to toe the line. Now, thanks to a law approved recently by Mexico's Congress, the CFC finally has the muscle to enforce its rulings. That includes the power to investigate companies that are anti-competitive, to block mergers, and to impose hefty fines.

Pérez Motta, Mexico's former delegate to the World Trade Organization, needs those extra teeth to take on billionaire Carlos Slim, Mexico's biggest tycoon and the world's third-richest man. Slim controls Telmex and Telcel, the dominant cellular carrier. It has 76% of the market and a subsidiary of América Móvil (AMX), his regional mobile operator. Until now, Slim's army of lawyers has managed to persuade courts to block most rulings—even though Telmex was declared a "dominant" operator four years ago, making it subject to anti-monopoly rules. Now, the CFC chief wants to boost his annual $15 million budget and hire more lawyers to go after Slim and others who thwart competition.

He will need all the help he can get. On Oct. 2 Mexico's Communications Secretariat published new rules allowing cable TV companies and telecom operators to provide phone calls, Internet, and video via the same wires or by wireless. Over the objections of smaller competitors, the government plans to allow Telmex to offer TV over its 18 million-plus phone lines, even though its original concession, bought in a 1990 privatization, didn't allow that.

TV TIME. Rivals say they won't be able to compete with the TV programming that Telmex, with a market capitalization of $26 billion, will be able to buy. One small consolation: Under the new rules, Telmex must first allow all competitors smooth interconnection to its telecom network before it will be allowed to offer TV content.

"We're satisfied that these new rules will boost competition by allowing in more players. But we are going to keep a close eye on Telmex to make sure it lives up to its interconnection obligations," says Pérez Motta. In the past, "Telmex hasn't exactly distinguished itself by living up to its commitments," he adds. Counters Telmex spokesman Arturo Alias: "It's sad that they try to punish a company just because it's big and invests $200 million per year."

Telecommunications isn't the only issue on Pérez Motta's anti-monopoly agenda. He vetoed the government's effort last year to sell two state-run airlines to a single bidder, and he put his foot down when an airport operator called to say he intended to start his own low-cost airline. "I told him very clearly that the CFC would not view that cross-ownership favorably,"Pérez Motta says. He blocked the merger of two railway companies (one owned by Slim), and plans an investigation into fees charged by highly profitable local banks, including some owned by foreign entities such as Citigroup (C).

PRESIDENTIAL BACKING. Not everyone is convinced that Pérez Motta and his commission are up to the task. "I'm not sure [the commission] will do any better, even with its enforcement powers," says Ramiro Tovar, an expert on regulatory issues at ITAM, a leading university in Mexico City. "The CFC has to do a better job preparing its legal cases," he adds.

But Pérez Motta's hand could be strengthened if he wins strong backing from President-elect Felipe Calderón: He takes office on Dec. 1 and is under pressure to prove to voters he's not beholden to big business. If Calderón decides to strongly back Pérez Motta's efforts, domestic and multinational rivals of the big boys may have reason to cheer.

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