The challenge of real reform

Despite much reform Mexico is continuing a progressive investment agenda aiming to grab an increased share of FDI. During 2007 Mexico obtained $23,230,000,000 of direct foreign investment, the greatest amount in six years and the second highest amount eve


By mutual agreement, one of the most pressing issues for Mexico is the need to improve its infrastructure, particularly transportation. To aid this on February 7 2008 the Mexican Official Federal Gazette launched the National Infrastructure Trust Fund (otherwise known as The Fund). This Fund constitutes a financing strategy to help modernise and expand Mexico’s infrastructure, operating as a public trust of which the National Public Works and Services Bank acts as a trustee.

What is the Fund for?

To encourage competitiveness;
Help sustain growth; and
Assist job creation and help provide equal labour opportunities.

One of the purposes of The Fund is to turn Mexico into a leader in infrastructure development in Latin America and, by 2030, for it to be among the top 20 percent of the world’s most highly rated countries for overall infrastructure competitiveness. The Fund functions as a venture capital fund in infrastructure and channels resources through different financial instruments such as guarantees, subordinated debt and venture capital. Projects are financed by federal budget, private sector investment and resources drawn down from The Fund’s assets.

The Fund operates as a project assessment center that will help establish investment priorities in the following areas:

Drainage and sanitation;
Railroads, ports and airports; and
Projects for generation of renewable energy

Real change promised for many areas
Energy reform is intended to change the legal framework to allow a more aggressive participation of the private sector in the generation of electric energy, as well as to permit the private sector to distribute electricity, extract and process oil and gas.

The falling production in the Cantarell oil field in the Gulf of Mexico is reducing revenue for the federal budget and the availability of oil in Mexico. That means Mexico will have to make alliances with oil companies who specialise in deep water exploration and production in order to drill and extract oil from other fields in the Gulf. This could also lead to liberalization and further investments in refining and in the oil pipeline system.

As to electricity, a bill was submitted the Mexican Congress in 2002 calling for amendments to the Constitution in order to promote new investment and legal certainty to investors in this sector. This took into account that neither of the public electricity utility companies, the Federal Electricity Commission or the Central Power and Light Company would be privatised. This proposal, however, is still before the federal Congress.

Meanwhile Mexico has established the National Climate Change Strategy as a mechanism to comply with its commitments under international treaties, such as the Kyoto Protocol, promoting clean and alternative energies, methane recuperation and carbon capture. Mexico has obtained clear benefits from the carbon emissions market. Up to now, 97 projects have been approved representing emission reductions of nearly 6.4 million tons of CO2 equivalents per year, placing our country, in terms of clean development projects, in 4th place – a hugely impressive achievement.

Recently, the Mexican Bioenergetics Promotion and Development Law was published, effective from February 2008. This Law provides incentives for the production, marketing and efficient use of bioenergetics, promotes the reduction of pollution and greenhouse effects, and aids in technological and scientific investigation in this area. The new law will promote the production of ethanol and biodiesel through the cultivation of sugar cane and corn.

Education reform
Extensive educational reform is promised. The main purposes of this educational reform will be to:

Achieve equality of opportunity in order to combat poverty;
Avoid the educational backlog caused by a lack of space; and
Promote investment in technology.

The Secretary of Public Education has already signed a cooperation agreement with eleven states for the purpose of ensuring that the National Council for the Promotion of Education improves basic teaching in the poorest municipalities in Mexico. Additional resources are promised to help provide this.

The Government will establish mechanisms to improve the professional quality of teachers and students. School principals are to be designated following a competitive process. Resources from the Student Aid Fund are to be assigned to 2,500 high schools in order to be used in education projects.

Judicial changes
The Mexican justice system has received different proposals from non-governmental organizations, judges, lawyers, public servants, and academics, such as those related to criminal procedure, public security and the amparo or constitutional action.

To protect human rights, it is important to change the criminal procedure system from a written to an oral system. To do so, some amendments may be necessary, namely:

To switch from the current semi-inquisitorial system to an adversarial system;
Restrict powers of the public prosecutor and transferring more powers to judges;
Guarantee all statements of a defendant to be made before a judge and in the presence of defense counsel;
Establish an abbreviated process where defense counsel and prosecutors agree on the sentence to be imposed; and
Create the position of a judge to control the pre-trial process.

Recently, the federal Chamber of Deputies approved a judicial reform in connection with some of the items described above, which now will be reviewed by the Senate.

Tax reform
At the beginning of October 2007, the Official Federal Gazette published several executive orders amending or repealing a series of Tax Statutes. On November 5, 2007 an order was published creating several income tax benefits and a single rate business tax.

The purpose of the reform was to enable the federal government to increase tax revenues for 2008. The tax reform seeks to decrease reliance on petroleum revenues from PEMEX and proposing a non-petroleum tax collection system. In order to establish this, the single rate business tax was created in order to obtain business tax revenue (this tax is a substitute for the previous asset tax). The single rate business tax is complementary to income tax. The Federal Tax Code was also amended, especially with respect to the tax authority’s auditing and enforcement powers.
Support from Mexico’s new Economic Support Program

The Mexican government recently announced the Economic Support Program including 10 measures aimed to strength the economy and mitigates the negative effects resulting from a deceleration of the US economy. This program includes reductions in income tax, single rate business tax, social security quotas and simplifies customs proceedings. It is estimated this will have an economic impact for the Mexican government of around 60 thousand millions pesos.

Labour relations
The reform of Mexico’s labour laws, currently deliberately biased in favor of employees, will be necessary in order to create more employment, better quality jobs, a more competitive economy and encourage more regional balance. Unfortunately, no proposed changes to labour laws have yet become law.

To help support reform in these areas, it will be necessary for a tripartite grouping of labour authorities, employers and employee organizations to develop policies capable of obtaining broad support for such initiatives to become law.

The Confederation of Industrial Chambers of Commerce, an employer organization, has presented to the federal Congress certain suggestions for reforming Mexico’s labour laws. Currently it is very expensive to fire employees. While this protects existing employees, it is a huge disincentive for employers to hire new staff or start new businesses.

The US and Mexico have both agreed upon a pilot project to determine whether the border between the two countries can be opened to cross-border land transportation of cargo.

The pilot project will have a term of one year and in its first stage, the US government will allow Mexican carriers a permit to operate cargo transportation services in the United States – as long as they fulfill certain conditions. In the second stage, the Mexican government will open Mexico’s border to cargo transportation by United States carriers, granting access to Mexican carriers in the first stage. After a year, if the evaluation of the pilot project results is favorable, this cross border opening may become permanent.

It is estimated the opening of the border for cargo transportation services between Mexico and United States will result in a saving of approximately 250 million dollars per year. The gradual access by Mexican transportation carriers to the United Stated is, obviously, highly strategically beneficial.

Antitrust changes
The modern era of antitrust law in Mexico began in 1993 when the Federal Economic Competition Law became effective and inaugurated a new age in the regulation of economic competition in Mexico. Thirteen years after the enactment of the Law, companies are becoming more familiar with the Law and the work of the Antitrust Commission related to anticompetitive behavior has substantially increased because of the rise in the number of complaints being filed. However, in our view, there is still much more work to do in order to have a developed antitrust culture.

About Basham, Ringe y Correa, S.C.
Basham, Ringe y Correa is one of the leading international full-service law firms in Latin America. Established in Mexico in 1912, Basham draws upon nearly a century of experience in assisting clients who conduct business throughout Mexico. The firm’s clients include prominent international corporations, many of them in the Fortune 500 list, financial institutions and individuals.

The firm’s group of lawyers and support staff are committed to maintaining the highest professional and ethical standards. Constantly exposed to the international legal system, many of Basham, Ringe y Correa’s lawyers have completed graduate studies at foreign universities and worked at companies and law firms abroad. The firm received the ‘Client Choice Award 2006’ from International Law Office, Chicago, Illinois. Recently, the firm also received ‘Who’s Who’ recognition as Mexican Firm of the Year 2007.

Specialist areas covered by Basham Ringe y Correa

Administrative/biddings/privatisations, antitrust;
Arbitration, banking and finance;
Litigation, corporate and contracts;
Criminal litigation, energy, environment;
Franchising, health, immigration, intellectual property;
International trade and customs;
Labour, land aviation and maritime transportation;
M&A, Real estate and social security;

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