Client Alert: Inside the Mexican Government’s Pact for Mexico

Following the election of President Enrique Peña Nieto in July 2012, Mexico’s three major political parties began holding joint discussions on the trajectory of reforms that Peña planned to undertake during his administration. The final product of the three-party meetings was the Pact for Mexico (Pacto por Mexico), an ambitious program of sweeping reforms aimed at restructuring the economy and enhancing anticorruption enforcement in Mexican society. Since the three parties announced the Pact on December 2, 2012 – the day after Peña took office – the reforms have attracted a wide degree of praise and support from across the Mexican political spectrum.

A substantial portion of the Pact includes reforms intended to boost Mexico’s economic growth and competitiveness. If implemented successfully, the economic reforms have the potential to transform an already attractive emerging market into a Latin American powerhouse on the same order as Brazil. Furthermore, the Pact contains plans for major changes and improvements to Mexico’s criminal law and judicial procedures, as well as anti-corruption and transparency initiatives designed to end the predations of bureaucrats and reshape the relationship between Mexicans and their government. 

Many of the Pact’s reforms will have a substantial impact on both Mexican companies and foreign companies operating in Mexico. In this client alert, we will provide an overview of those reforms and an analysis of their possible effect on local and foreign companies.
  
Economic Growth

Competition

In this arena, the Pact calls for strengthening competition in all sectors of the Mexican economy, but with a special focus in strategic activities such as telecommunications, transportation, financial services, and energy.

The first steps have already been taken with the Constitutional amendments published in the Official Federal Gazette in June 11, 2013, which established that within the following 180 days, the Mexican Competition Commission will be transformed into a new constitutional autonomous agency – the Federal Economic Competition Commission. This new competition authority will have broad powers to eliminate anticompetitive market structures (i.e., order the elimination of entry barriers; order divestment of assets in any portion required to eliminate anticompetitive effects; regulate access to essential facilities).

One important procedural change will be that the new competition authority resolutions can now only be challenged through the amparo trial (a form of constitutional relief) before Specialized Courts that will deal exclusively with economic issues (i.e., antitrust and competition; broadcasting and telecommunications). Before these amendments there were multiple appeal opportunities (both administrative and judicial) to challenge the Commission resolutions making competition enforcement inefficient in some cases.  

Finally, the constitutional amendments refer to the need to incorporate new criminal provisions to sanction monopolistic practices (which includes cartel and unilateral conduct) and illegal concentrations. Currently, only cartel conduct may be subject to criminal prosecution and sanctions.

Telecommunications

The constitutional amendments related to competition also create the Federal Institute of Telecommunications, replacing the current Telecommunications Commission. This new authority will be vested with constitutional autonomy and will be in charge of enforcing competition in the telecommunications industry (i.e., the new Institute will have the power to investigate and sanction monopolistic practices and illegal concentrations in the telecommunications markets).

As with the Federal Economic Competition Commission, the Federal Telecommunications Institute resolutions can now only be challenged through the amparo trial, before Specialized Courts that will deal exclusively with economic issues.

The changes in the telecommunications sector are aimed at supporting the right to broadband access and freedom of information, which the amendments have elevated to the status of human right. The amendments also include the following changes: (i) a new licensing regime, establishing a single license for telecoms and broadcasting operators; (ii) the elimination of certain thresholds for foreign investment (wireline and wireless technology, CATV/DTH/satellite radio, satellite operators/landing rights) and the reduction of others (49% broadcasting); (iii) asymmetric regulation for dominant carriers; (iv) the creation of a new national carrier of carriers; (v) incorporation of must carry / must offer obligations; among others.

Financial Reform

The pact includes a proposal for financial reform, with the main goal of increasing the availability and affordability of credit. The financial reform, which was submitted to the Mexican congress in May 2013, consists of four main proposals. First, it provides a new mandate to the Development Bank to support the growth of the financial sector. Second, the financial reform seeks to encourage competition in the financial system in order to lower interest rates, including by strengthening the National Commission for the Protection of Users of Financial Services (“CONDUSEF”), making it easier for individuals to switch banks, and possibly through the creation of a national credit bureau. Third, the financial reform aims to generate additional incentives for banks to lend more, including by simplifying the procedures/standards for granting and enforcement of loan guarantees and creating a Bureau of Financial Institutions where borrowers can find relevant information on financial entities. Fourth, the financial reform seeks to strengthen the banking system so that it will enjoy sustained growth, including by periodically evaluating banks to promote greater lending, improving coordination among the financial authorities by strengthening the Council on Financial System Stability, adopting Basel III standards as law, increasing the specialization of federal courts on banking issues, and facilitating the bankruptcy process.

Energy

One of the potentially most interesting reforms proposed under the Pact relates to energy. The Pact proposes creating a more competitive and efficient Mexican energy market by opening some of national oil company PEMEX’s activities to private investment, particularly in the areas of infrastructure, technology and utilization of resources, or at least through the creation of shared public-private schemes. Importantly, the Pact does not envisage the full privatization of PEMEX or hydrocarbon resources.  

Mining

The Pact includes a commitment to make the Mexican mining industry more efficient and socially responsible. The proposed vehicle for this change will be a new Law on Mining. Specifically, the new law will change the process for awarding concessions and making royalty payments linked to production. The new law will also ensure that the payments received in relation to production will go primarily to the local municipalities and communities where mining occurs, and that mining activities will take into consideration the “traditions and social cohesion” of affected communities.

Transparency and Anticorruption

Anticorruption System

The Pact also calls for the creation of a National Anticorruption System. The National Anticorruption System will be created via a constitutional reform and will establish a National Commission and state commissions with powers enabling them to prevent, investigate, and mete out administrative sanctions. The Pact further promises a “special emphasis” on entities such as Pemex and the Federal Electricity Commission (“CFE”). The Pact’s anticorruption element also calls for the creation of a National Council for Public Ethics, which will unite different authorities of the Mexican state with civil society members to develop different methods of combatting corruption. As of April 2013, negotiations over the actual adoption of the National Anticorruption System were ongoing, with the passing of implementing legislation planned for September 2013.

What to Make of the Pact for Mexico?

Upon first viewing, the Pact appears to be the most significant and ambitious Mexican reform project in decades. More importantly, the buy-in by a majority of political forces in the country would seem to suggest a high likelihood of success. Nevertheless, the early implementation of the Pact indicates that a wait-and-see approach would be wise. Specifically, it appears that the Peña administration is taking a ‘staged’ approach to the reforms, in which it front-loads the ‘low-hanging fruit’ (i.e., uncontroversial reforms) to the beginning. Thus, education, finance and telecommunications were the first reforms undertaken by the government.

The other reforms, however, are more controversial in terms of both the form and substance they should take. For example, there is a disagreement among the political parties as to whether the anticorruption commission should be vested with the authority to investigate and bring judicial cases against those suspected of corruption. Similarly, the exact boundaries of the area of the energy sector that will be open to private investment are not established in the Pact. Moreover, these disagreements relate almost entirely to the implementing legislation of the Pact, and not to the actual implementation of adopted legislation by executive branch agencies.

Although the Pact in principle represents a tremendous path towards becoming a modernized, innovation-driven economy, foreign and Mexican companies alike would be wise to closely monitor the implementation of the Pact. Indeed, the seriousness with which the Pact is implemented will serve as a useful barometer for whether the Pact represents a sea change in Mexican politics or instead shows the continuation of business as usual. 

Gerardo Calderon-Villegas is an Associate from Baker & McKenzie’s Mexico City office and is currently working with the firm’s Investigations and Business Crimes and Corporate Compliance Groups in Washington, DC. He can be reached at gerardo.calderon@bakermckenzie.com
 
Jesse Heath is an Associate in the Investigations and Business Crimes, White Collar, and Corporate Compliance Groups in Baker & McKenzie’s Washington, DC office. He can be reached at jesse.heath@bakermckenzie.com