Data & Intelligence
Mexico: Structural Reforms on Energy and Infrastructure. What’s Next?
It has been known that since 2012, and thereafter, having President Peña Nieto taking office, and with the support from opposition politicians, the Mexican government has pushed forward an ambitious set of structural reforms aiming at tackling the most deeply entrenched problems in the country and triggering the overall economic growth by seeking to attract investment, and, hence, create business opportunities. Spotlight has been directed to the so-called energy reform which encompasses a new constitutional, legal and regulatory regime that allows participation of private investment in sectors which – for over half a century – were monopolized and reserved to Mexican state-owned entities (Petróleos Mexicanos (PEMEX), and Comisión Federal de Electricidad (CFE)).
Prior to that, similar to other emerging economies in Latin America such as Brazil, Chile and Colombia, and as a means to foster and further attract investment and develop required infrastructure, Mexico enacted its new publicprivate partnership (PPP) law (Ley de Asociaciones Público Privadas) and applicable regulatory regime.
In compliance with the mandate set forth in the Constitution, and in line with the 2013-2018 National Development Plan, in April, 2014, President Peña Nieto’s administration issued the 2014-2018 National Infrastructure Program (Programa Nacional de Infraestructura 2014-2018 (PNI)), which sets forth the objectives being sought by the Mexican government to develop infrastructure associated to strategic areas to boost the economy. These strategic areas include the energy, transportation and communications fields, among others.
Programa Nacional de Infraestructura 2014-2018 (PNI)
The PNI contemplates a budget of MXN$7.7 billion (approximately US$570 billion) to be spent in the 2014–2018 period.
Of this PNI budget for instance, MXN$2.4 billion (around US$180 billion) are being allocated to expenditures in hydrocarbons-E&P activities; other MXN$1.3 billion (approximately US$97 billion) are being contemplated for development of communications and transportation systems (covering new highways, trains and railroads, a new Mexico City’s subway line, refurbishment of over 20 airports throughout Mexico—except for Mexico City’s which is contemplated separately—among others); and MXN$227 thousand million (approximately US$17 billion), are being allocated to the continued growth of Mexico’s gas and liquids pipeline infrastructure. According to President Peña’s administration, the budgetary allocations to the PNI represent a 35% increase over the budget allocated to infrastructure development in the former President Calderon’s administration.
The PNI and its growth with respect to the plans of former administrations is part of President Peña’s wide-ranging plans that aim to boost economic growth in Mexico. It is also part of those plans and is already in progress of implementation the Energy Reform which, as explained above, puts an end to the monopoly of state-run electricty and oil companies and opens the energy sector to private investors and partnerships.
PEMEX and CFE will no longer be decentralized public entities of the Mexican government, but rather state productive enterprises subject to their own special regime, in line with the corporate governance principles and the guidelines for corporate governance of State-owned enterprises adopted by the OECD. These changes and the transformations of these entities into independent operators in their respective fields allow both, PEMEX and CFE to have flexibility as to what projects to develop, what structures to follow for their development, whether to pursue them by their own or thorough an affiliate incorporated to that end (maintaining nevertheless, a majority of their capital at all times, though), or to seek to develop any such projects through a partnership, association or other type of ventures with private participants.
Notwithstanding the Energy Reform and the liberalization for participation of private investment, as well as the reorganization of PEMEX and CFE, they both will continue to be key players in their respective fields; it is envisioned that at least in the short to mid-terms, they both will nevertheless remain subject to scrutiny by the Mexican antitrust authority given their predominance in the respective areas of the industry. In this line, it is expected that private participants may seek to approach the Mexican –liberalized–energy market, in some type of arrangement with either PEMEX or CFE (through their newly formed state productive enterprises); whether them being service contracts, joint ventures or, as in some cases even expressly provided, partnerships in a PPP scheme.
For instance, Mexico has been known to have a great potential in respect of geothermal energy; resources and prospective and proven reserves of geothermal energy have become of interests for participants desiring to develop that type projects in Mexico. The new framework embodied in the Energy Reform allows for private investment to participate in exploration and commercial exploitation of geothermal resources, subject to obtaining the corresponding registrations, permits and concessions from Mexico’s Ministry of Energy.
Similarly to PEMEX’s own round zero (the procedure through which it asked the National Hydrocarbons Commission to keep all its current oil and gas E&P commercially operating areas), CFE will be entitled to request geothermal areas for continuing operations or to seek for exploring and exploiting them; all such areas not granted to CFE for exploration or exploitation may be either awarded to private entities through public bidding procedures to be called by the Ministry of Energy, or through private developers establishing a PPP scheme with CFE.
Mexico’s Federal PPP Law
Mexico’s federal PPP law – which like in many other countries having their own PPP schemes in place, is not solely intended for energy or communications’ infrastructure projects —includes several features that will give developers and investors great certainty.
Among the main features embodied in the PPP law, we note that (i) there is a much thorough effort for transparency and publicity of processes; (ii) there are clearly defined rights and obligations, risk sharing, (e.g. liquidation damages on default), etc., aimed at protecting investors’ and developers’ interests while allowing them certain flexibility; (iii) there are specific rules for investors taking security interests in tangible and intangible assets, temporary step-in rights and compensation rights if a contracting authority terminates a contract, and (iv) feasibility of submission to jurisdiction of domestic or international arbitration (as opposed to local courts).
For 2015, PEMEX and CFE have received a Federal budgetary allocation of up to MXN$350 thousand million for infrastructure investment; in 2015, both companies shall have concluded their transformation into state productive enterprises and have implemented their respective special regime (hence allowing them flexibility to engage into arrangements for participating into projects along with private parties or other schemes). Furthermore, PEMEX has announced a plan to invest over US$15 billion in the refurbishment and reconfiguration of one of its refinery complex at Tula, Hidalgo. The Ministry of Communications and Transportations continues its plans for developing up to four new train and railroad projects (including the much controverted Mexico–Queretaro speed train, and whose new public bid is expected to commence and be called on December 13, 2014), over 10 highway projects, extend the capacity of port terminals and develop new specialized container port terminals, to name a few.
Opportunities and projects in Mexico in following years, whether as a result of the Energy Reform or as projected infrastructure projects, and whether or not through a PPP scheme (as other type of ventures may be assessed depending on each case), have grown considerably. Legal and regulatory foundations are being set in place; it is time for and is now up to the Mexican government, the Mexican state productive enterprises, as well as for Mexican and foreign investors, to put them to the test.
About the Authors
Daniel E. Sánchez is a Local Partner at White & Case
José Ignacio Segura Alonso is a Local Partner at White & Case
Renuka Ramnath | Founder, Managing Director & Chief Executive Officer, Multiples Alternate Asset Management Private Limited
Brian Lim | Partner and Head of Asia and Emerging Markets, Pantheon Ventures
David Rubenstein | Co-Founder and Co-Executive Chairman, The Carlyle Group
Dr. Andrew Kuper | Founder and CEO, LeapFrog Investments
Torbjorn Caesar | Senior Partner, Actis
Drew Guff | Managing Director & Founding Partner, Siguler Guff & Company