The flow of foreign capital has become one of the main drivers of business in Mexico and has principally arrived through privatisations of public companies, investment in already existing Mexican subsidiaries by their foreign parents, and M&A. For example, during 2008, Mexico obtained $18.59bn direct foreign investment, with the US as the main source of capital. In 2007, the nation obtained $27.167bn direct foreign investment, the largest amount in six years and the second highest amount ever received by Mexico, surpassed only by the level of direct foreign investment reached in 2001, the year in which Citigroup acquired Banamex.
Although the financial and economic crisis in the US (upon which Mexico’s economy depends to a great extent) has affected Mexico, business continued satisfactorily. During 2008, M&A transactions were not affected by the crisis, but currently M&A activity is diminishing as a consequence of the resulting recession. Direct foreign investment and the growth of international production have taken place mainly via cross-border M&A.
It is expected that many investors will continue to invest in Mexico during the next two years due to the fact that Mexico conserves its solid position as one of the main investment destinations in Latin America and that it has a close commercial relationship with the United States.
The US recession is affecting Mexico with the contraction of the GNP, an increase in unemployment, a reduction in oil production revenue, the slump in the value of the Mexican peso with respect to the US dollar, and the fall in the stock market, among others.
Basham, Ringe y Correa has taken part in different M&A transactions for 2007 and 2008, such as the purchase of a logistic company, including advising on senior secured financing for $270m the dissolution of a joint venture between Desc, now Grupo Kuo, and Dana of an auto parts business, as well as the purchase of a portion of the shares in the capital of the Toluca International Airport. The firm also participated in a joint venture between Grupo Kuo and Grupo Herdez for the production and sale of food, the acquisition of a 49 percent stake in the capital of the holding company of a steel producer, and the acquisition of 100 percent of the shares of a tyre manufacturer, among others.
M&A activity has been implemented either through bids (public or private) or purchase or sell offers (even through takeovers). Either structure represent some pros and cons; however, every day becomes more common to implement M&A transactions through bids, mainly with the participation of investment or brokerage firms acting as managers of the process.
Mexican reforms
Over the past few years, many political, economic, and social changes have occurred in Mexico. This has led to many reforms and proposals for reforms, some of which have been adopted and some of which have met with political opposition which has forced them to be delayed or withdrawn. Public and private sectors of the economy agree, however, that if Mexico is to continue to advance, to continue to receive a large share of foreign investment, and to take full advantage of its potential, it is necessary for the country to continue the process of reform.
Some of the areas of concern are the following: (i) antitrust; (ii) judicial; (iii) transportation; (iv) economic support program; and (v) education.
Civil
The Federal District legislature approved the Ownership Extinction Law for the Federal District which provides that the ownership of or possessor rights over property located in the Federal District (Mexico City) that are obtained from proceeds from the following crimes may be confiscated by the government: (i) organised crime; (ii) kidnapping; (iii) vehicle robbery; and (iv) human trafficking. In the event that the illegal source of funds to acquire or use real or personal property is proved, no consideration or compensation will be given for the confiscation.
Energy
After a review by Congress of several legislative proposals made by the president and several political parties to amend and enact new laws dealing with the energy sector, on November 28, 2008 energy reforms were published in the Federal Official Gazette and entered into force the day after. The constant low level of oil extraction and production, as well as decreasing market prices, contributed to motivating Congress to approve the series of legislative proposals that will give Pemex tools to be more efficient.
The energy reforms are intended to modernise and improve the gas, oil, and bio-energy industries in Mexico, allowing greater participation by the private sector, and strengthening the organisation and operation of Petróleos Mexicanos, the Mexican state-owned oil company also known as Pemex.
The amendments and new laws may be summarised as follows:
a) Amendments to several articles of the Law Regulating Article 27 of the Constitution with respect to Petroleum.
b) Amendments to Article 33 of the Federal Public Administration Organisational Law, granting additional authority to the Department of Energy to establish and manage energy policies.
c) Passing of the National Hydrocarbons Commission Law which contemplates the creation of such a commission with the technical capacity to regulate and supervise the exploration and extraction of hydrocarbons.
d) Amendments to several articles of the law that Establishes the Energy Regulatory Commission, providing it with greater authority and technical, operational, managing, and decision-making independence.
e) Passing of the Sustainable Use of Energy Law to seek to optimise the careful use of energy, from production to consumption.
f) Finally, passing the Mexican Petroleum Law which will regulate the organisation and the operation of Pemex. This law will control the contractual involvement of Pemex with private companies interested in taking part in the hydrocarbon sector. In addition, the Mexican Petroleum Law is supposed to strengthen the Pemex Board of Directors by giving it full authority to conduct Pemex’s business and allowing the participation of independent directors and the hiring of private contractors through a more simple and expedited process, different from that applicable to all other government entities.
The new board of directors is composed of 15 members, six appointed by the president, five members appointed by the Oil Workers Union, and four professional members nominated by the president and proved by
the Senate. To strengthen the operation of the board of directors this new law also establishes mainly the following committees:
• Evaluation of Development.
• Investments and Strategy.
• Acquisitions, Leases, Works, and Services.
Notwithstanding the foregoing and although the energy reforms give Pemex more autonomy, new regulations, manuals and commissions will have to be created to complement the energy reforms. It will not be possible to truly know their reach and benefits for at least one and a half to three years.
Infrastructure
The creation of the National Infrastructure Trust Fund (the “Fund”) constitutes a financing strategy for the modernisation and expansion of Mexico’s infrastructure. This fund operates as a public trust which the National Public Works and Services Bank acts as trustee. The trust will have a duration of 50 years.
It is a key to encouraging competitiveness, sustained growth, job creation and providing equal opportunities. One of the purposes of the fund is to turn Mexico into a leader in infrastructure development in Latin America. It 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 the federal budget, private sector investment, and resources drawn from the fund’s assets.
It operates as a project assessment centre that will help establish investment priorities in the following areas, among others: (i) highways, roads and bridges; (ii) water, irrigation, drainage and sanitation; (iii) railroads, ports, airports, urban and interurban transport; and (iv) projects designed to preserve the environment and biodiversity, such as handling of solid waste and natural resources, as well as generation of renewable energy.
On the other hand, on January 26, 2009, the government published an amendment to the basis for taking part in public bidding for the multimodal project in Punta Colonet, Baja California.
The aforementioned bidding includes the granting of the following concessions:
• The construction, operation and use of a railway, as well as for the provision of railway public service.
• A concession for the administration of the port facilities.
• A concession for the use of governmental owned property in the port facilities for the construction, operation and use of a commercial terminal.
Punta Colonet is located in Baja California, near to the border with the United States. The project will require an initial investment of $4-7bn dollars. Its main purpose will be to serve as a relay port for United States imports from Asia, due to the fact that there is heavy demand for the use of ports in the United States (Long Beach and Los Angeles) and in Mexico (Manzanillo) but limits to their capacity.
Labour
The reform of Mexico’s labour laws, currently deliberately biased in favour of employees, is considered necessary in order to create more employment in the formal sector of the economy, create quality jobs, improve the labour conditions and promote a more competitive economy to encourage economic growth. To help produce a workable reform in this area, it is necessary for a tripartite grouping of labour authorities, employers, and employees’ organisations to be used to develop policies capable of obtaining sufficiently broad support to become law. Unfortunately, no proposed changes to labour laws have become law yet.
This reform has become even more important in order to create employment, due to the fact that as a result of the world recession, a considerable number of employees have been fired and in the coming months, the number of fired employees will continue in increase.
Some of the proposals made by the Department of Labour, labour unions, Congress, and the private sector are, among others, the following:
a) To regulate outsourcing companies.
b) To facilitate access to employment and improve the performance of employees with disabilities.
c) To create new ways of hiring employees.
Basham, Ringe y Correa, SC
Basham, Ringe y Correa is one of the largest and 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 its clients in conducting 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 have worked at companies and law firms abroad. The firm received the ‘Client Choice Awards 2006 and 2008’ from International Law Office and the “Who’s Who” recognition as the Mexican firm for the years 2007 and 2008.
Among the main areas of practice of the firm, are the following: administrative/biddings/privatizations, 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, mergers and acquisitions, real estate, social security and telecommunications.
For further information email: delrio@basham.com.mx; serra@basham.com.mx;
Website: www.basham.com.mx
Contacts: Daniel del Río (delrio@basham.com.mx)
Juan Carlos Serra (serra@basham.com.mx)
