Mexico is undergoing deep and rapid change, emerging as one of the world’s most promising investment destinations. An ambitious program of structural and economic reforms is changing the investment landscape and investor interest is piquing on a global scale. Significant changes in areas such as finance, energy, infrastructure, education and labor laws are on track to help Mexico realize its potential.
In order to help management teams understand some of these changes, we have provided a very high level overview by sector.
The energy reform in Mexico covers two main areas; hydrocarbons pursuant to the Hydrocarbons Law (as explained below) and geothermic and electric energy pursuant to the Electric Energy Law and the Geothermic Energy Law. Please note that pursuant to the Constitutional reform from which the above-mentioned energy reforms are derived, several new laws, regulations and modifications will be implemented.
In relation to the hydrocarbons reform, please note that pursuant to this reform a new legal framework for all hydrocarbon-related activities in Mexico has been established, including the following main modifications:
- For exploration and production (E&P) activities, the Hydrocarbons Law establishes two different regimes to be regulated by the National Hydrocarbons Commission: Entitlements (Asignaciones) granted to State Productive Enterprises (wholly owned state entities, including PEMEX) and E&P agreements entered into with private parties or State Productive Enterprises; and
- For midstream and downstream activities (treatment, processing, import and export, transportation, storage, distribution, compression, liquefaction, decompression, regasification, marketing and retail sale of crude oil, natural gas, petroleum products and petrochemicals, integrated pipeline transportation and storage systems), the law establishes a permit regime to be generally regulated by the Ministry of Energy and the Energy Regulatory Commission.
An Exploration and Extraction Agreement or an Entitlement (Asignaciones) must be granted in order to explore and extract hydrocarbons if they exist in an area subject to a mining concession (the mining concession must not be associated with coal). This rule also applies to the exploration and extraction of natural gas where it is associated with coal that is located outside of a mine.
According to the above, a mining concession does not grant any preferential rights for the exploration and extraction of hydrocarbons except where natural gas is associated with coal. If a mining concession is not associated with coal, mining concessionaires will be entitled to request the direct adjudication of an Exploration and Extraction Agreement.
Please note that pursuant to the new legislation, mining concessionaries will not be able to oppose the laying of pipelines, cables or the installation of any infrastructure works within the area of an assignment, permit or Exploration and Extraction Agreement, whether technically feasible.
Mining and METS:
Another important mining reform saw the creation of the Contribution Fund for the Sustainable Regional Development of Mining States and Municipalities (Fondo de Aportaciones para el Desarrollo Regional Sustentable de Estados y Municipios Mineros). This Contribution Fund obliges mining concessionaries to pay 5% from its net taxable income in order to contribute to the sustainable development of the corresponding state and municipality.
Agriculture and Agri-technology:
There have been no recent reforms in this sector, however, foreign investment is not limited in agriculture and agri-technology matters.. The Foreign Investment Law (Ley de Inversion Extranjera) is the only limitation to investments and pursuant to Article 7 of said law, foreign investment shall be limited to the 49% of shares representing the capital stock of companies who owns agricultural, livestock and forestry lands.
Telecommunications and Electronic Components:
The recent reforms modified the following aspects of the former Federal Telecommunications and Broadcasting Act:
- the Federal Telecommunications Institute (FTI) is authorized to prevent monopolistic practices in this sector;
- the Mexican authority is obliged to grant two new concessions for open broadcasting networks (cadenas de televisión abierta). The new broadcasters will have access to the infrastructure of broadcasters considered as preponderant;
- new penalties are provided in order to protect the consumer of the corresponding services;
- regarding mobile and fixed-line communications, phone companies are not longer allowed to charge special fees for long distance calls;
- a transition to digital television is provided (from analogical television);
- intervention of private communications for national security reasons is provided, etc.
The telecommunications reform also includes a Congressional mandate to enact legislation establishing a unique regime of concessions and mechanisms. The mandate will allow for the promotion of competition through the creation of asymmetric regulation and the elimination of barriers to competition, monopolization, and cross-property etc. Likewise, the principles of must offer / must carry have been elevated to constitutional status. The reform also mandated the Federal Telecommunications Institute – an autonomous constitutional telecommunications and broadcasting body – to determine the existence of preponderant economic agents in the sector.
The Federal Telecommunications Broadcasting Act is fundamentally a law of economic content that aims to regulate the telecommunications and broadcasting markets within that context. The Act does not prejudice the establishment of minimal technical norms, consumer and audience rights, or collaboration with the authority. With this in mind, the Constitutional Telecommunications Reform, as well as the Federal Telecommunications Broadcasting Act, depart from the premise that the market by itself has not been able to establish the conditions of effective competition; reason being that it is necessary to establish the legal means that redefine the property rights of the participants and allow the flaws in the market to be amended as well as create a robust regulator with enough tools to apply said mechanisms.
Mexico’s ambitious infrastructure plans require significant Public Private Partnership (PPP) investment. The new federal PPP law gives investors and contractors a more certain and more familiar environment. Key changes include:
- A thorough, transparent bidding process.
Requests for proposals will be widely published and contracting authorities have to prepare feasibility studies for prospective PPPs. Bidders can present unsolicited proposals; they can recover reasonable bid costs and will have a financial advantage at a public bid stage.
- Minimum mandatory terms.
The terms protect investors’ and developers’ interests and allow flexibility (e.g., clearly defined rights and obligations, risk sharing, liquidation damages on default), but the parties define the detail.
- Clearer rights for investors.
These include rules on taking security interests in tangible and intangible assets, temporary step-in rights and compensation rights
if a contracting authority terminates a contract.
- Dispute resolution via arbitration.
The right to domestic or international arbitration expressly exists and is consistent with the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Commercial Arbitration. Arbitration awards can be enforced.
About Harris Gomez Group:
Harris Gómez Group is an Australian-Latin American legal and business advisory firm. In 2001, HGG was the first Australian law firm to have a local office in Latin America. The firm specialises in Common Law and Latin American cross-border issues in areas such as Mining and Energy, Corporate, Mergers and Acquisitions, Tax, Intellectual Property and Business Enterprises. With over 21 years of experience immersed in the respective legal and business cultures of Australia and Latin America, we create a seamless bridge between the two regions and have become an essential partner to many multinational enterprises.
If you need assistance with expanding your operations into Mexico or have an existing business, do not hesitate to contact us at email@example.com