Moving forward: A raft of recent reforms targets transparency and energy investment

The year 2013 was one of legal reforms in Mexico. It was possible to enact key changes thanks to the willingness of the main political forces in the country to agree to them, as expressed in the Mexico Pact (“Pacto por México”). Since President Enrique Peña Nieto took office in 2012, his government has put in place structural reforms in two main areas: increasing competitiveness and strengthening the institutional system.

ENERGY REFORM: In 1938 President Lázaro Cárdenas expropriated the Mexican oil and gas industry, and Petróleos Mexicanos (Pemex) was created as a government-regulated company and the sole operator of the energy industry. Since then, various events have transformed Mexico’s position in the global oil and gas industry, including the discovery of the Cantarell Oil Field in 1971, a “supergiant” oil field, where average production up until now has been 408,000 barrels per day (bpd). Throughout the years, many subsidiaries of Pemex were created for specialised fields, including exploration and production, refining, gas, and basic and specialised petrochemicals. In May and June 2005, Pemex reached a point at which it was producing a daily average equivalent to 3.46m bpd. At present, Mexico is globally ranked 10th in crude oil production, 13th in natural gas production, 15th in refining capacity, 18th in proven crude oil reserves and 30th in proven gas reserves, according to Pemex’s 2013 Statistical Yearbook. In 2012 the country produced 2.54m bpd of crude oil and 6.38m cu feet of natural gas per day (see Energy chapter).

In 2008 seven new statutes and amendments to existing energy laws were enacted, which constituted the first significant step in energy reform. These include the Petroleum Law, Sustainable Use of Energy Law, National Hydrocarbons Commission Law, as well as the Renewable Energy Use and Energy Transition Financing Law and a number of other amendments to energy sector regulation. It is important to realise that there is a necessity to expanding investment in exploration and production activities in Mexico, given that these areas are not currently achieving their full potential.

Regarding shale gas and oil, Mexico holds the world’s fourth-largest reserves, according to the US Energy Information Administration, with reserves of shale oil estimated at the equivalent of 60.2bn barrels of crude. Due to the lack of investment, exploration and exploitation of shale has been marginal and, as a result, Pemex is set to invest $200m in exploring for shale gas in the north-east of the country, where five potential basins have been identified along the Gulf of Mexico coast. In addition, Mexico is discovering additional new fields, including deposits of heavy and extra-heavy crude oil. Pemex estimates that approximately 26.6bn barrels of crude oil lie below deep-sea Mexican waters. However, the state body does not have the technological capacity to fully explore this potential, thus it is precisely this reason why the need to invest in technology and resources is driving the constitutional changes that were approved. Indeed, Congress passed several energy reforms, which came into effect in December 2013, including amendments to the Constitution to allow private investment in the petroleum and hydrocarbons industry, as well as in the operations of the electricity sector. This decision was taken in order to allow more investment in the oil and gas industry and to enhance Mexico’s position globally.

No concessions will be granted with respect to petroleum or hydrocarbons; rather, exploration and extraction will be carried out by way of allocations or agreements with state production companies like Pemex or via agreements with private parties. These agreements are to ensure maximum transparency and create the greatest benefit for the country, and are based on the following compensation schemes: a) Service agreements; b)Shared income agreements; c) Shared production agreements; d)Licence agreements (in which petroleum and the hydrocarbons are property of the state until their extraction from the sub-soil, and once they are extracted may be sold to private parties). e) Agreements that include a combination of any of the above. Allocations or agreements, and income from these, may be shown by private parties for accounting or financial purposes whenever it is asserted that petroleum and hydrocarbons are state property. The main point in this reform, and the reality of what is going to happen in the oil and gas sector in Mexico, is that Pemex will be transformed into a state production company, separate from the federal government and its budget. Pemex’s workers’ union will remain separate from the board of directors. The group may transfer allocations of areas for exploitation and extraction into agreements with private parties, although the selection of the contractor will be made by the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH) through public bidding.

A new bidding format which will be referred to as “round zero” will be included, consisting of the allocation by the government to Pemex of specific fields for exploitation and exploration. Pemex will request for the Ministry of Energy (Secretaría de Energia, SENER) to allocate within 60 calendar days following the date the energy reform entered into effect, while SENER will issue a decision within 180 calendar days of the date of the request, establishing the terms of allocation.

Certain changes will also go into effect regarding Mexico’s electricity sector. It is important to note here that the government will continue to operate the national electricity distribution grid. Further, the changes are to ensure that electricity transmission and distribution – being state resources – are given preference over any other exploitation of the surface and subsoil.

The participation of private parties in electric energy transmission and distribution will be permitted through agreements, with private participation in the generation and sale of electricity also possible. As in the case of Pemex, the Federal Electricity Commission will become a state production company.

In order to comply with the energy reforms’ changes, the following public entities have been created:

• Mexican Petroleum Fund: the Bank of Mexico ( Banco de México, BdeM), which is the central bank, will act as trustee and shall receive, administer and distribute the income from both allocations and agreements for exploitation and exploration (except for taxes), and make the payments set out in them;

• National Centre of Energy Control: in charge of the operation of the national electricity system, as well as operation of the wholesale electricity market and access to the national transmission grid and general distribution grids;

• National Agency of Industrial Security and Environmental Protection for the Hydrocarbon Sector: supervising and regulating facilities and activities in the hydrocarbons sector, dismantling and abandonment of facilities, and control of waste. Transformation of the following public entities has also been proposed in order to make them tie into the new regulations:

• CNH;

• Energy Regulatory Commission. The government will also adjust the legal framework in order to include the National Sustainable Energy Use Programme, and a transition strategy to promote the use of cleaner technology and fuels.

A law will be passed to regulate the exploration and exploitation of geothermal resources to use subsurface energy for the purpose of generating electricity. SENER will allocate certain areas and grant agreements to state production companies (namely Pemex), with technical assistance from the CNH.

While energy reform is the result of different ideas and events that have allowed Mexico to recognise its potential as an oil and gas producer is greater than previously realised, it is key to note that secondary legislation is needed, as well as more time and effort.

COMPETITION AND TELECOM REFORM: Competition enforcement began in 1993 when the Federal Competition Commission (Comisión Federal de Competencia, CFC) came into force and inaugurated a new age in economic regulation. The law was amended in 2006 to strengthen the powers of the CFC and increase sanctions; and also in 2011 to create the same enforcement tools as available in US and European competition agencies, namely, a leniency programme, dawn raids, higher fines, criminal penalties and introducing the concept of “joint market power”, among others.

The CFC had been an independent agency of the Ministry of Economy with technical and operational autonomy. However, as a result of the recently enacted amendment to the Constitution, published in the Official Federal Gazette (Diario Oficial de la Federacion, DOF) in June 2013, the CFC has been succeeded by a newly created autonomous constitutional entity called the Federal Economic Competition Commission (Comisión Federal de Competencia Económica, COFECE).

In addition to this structural change, all of the new commissioners have been appointed in accordance with the requirements established under the Constitution, which stipulates that candidates must be approved by an independent committee before being submitted to the president for final selection and submission to the Senate for confirmation. This amendment also includes certain modifications to legal actions. For example, it was made clear that the only means of challenging COFECE decisions is by way of constitutional (“amparo”) action. Specialised courts were created to hear these amparo actions. As for structural and jurisdictional changes, the number of commissioners was increased from five to seven, and radio and telecommunications matters were carved out of the jurisdiction of the COFECE, transferring this to a different authority, the newly created Federal Institute of Telecommunications. Moreover, a new anti-trust law will be enacted at some point during 2014 to address the constitutional amendment; in the meantime, the current law will remain in force. The new law is set to provide the COFECE with more power and tools in competition enforcement.

FINANCIAL REFORM: In January 2014 the DOF published its financial reforms, of which the most relevant aspects are: 1. Promulgation of a new act to regulate financial institutions in order to strengthen the corporate governance of holding companies. A more flexible corporate structure is contemplated for investment by holding companies, since holding companies could previously invest directly and with at least 51% of the paid-up capital in a financial institution, or in complementary or auxiliary services companies forming part of the same financial group. 2. Strengthening of the National Financial Services Users Protection Commission (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros, CONDUSEF), creating a bureau for financial institutions to allow users to obtain information to aid decision-making, as well as a system for proceedings to resolve disputes. CONDUSEF is authorised to issue recommendations to financial institutions and bring them to the attention of trade associations, as well as of the general public in order to improve the financial services provided by such institutions; furthermore, CONDUSEF is authorised to regulate form contracts and transactions receipts, as well as to prevent the use of false information by financial institutions in accordance with rules and regulations issued previously. CONDUSEF will also have more authority to exclude improper clauses that form contracts may include in order to reduce prejudice to users. Another objective is to promote and issue more loans, giving borrowers more security and support by CONDUSEF. 3. Multiple-purpose financial institution (“sociedad financiera de objeto múltiple”), also known as a SOFOM, and general deposit warehouses: regulation and supervision for SOFOMs will be increased regarding creation, registration, operation and supervision. Registration with the CONDUSEF is a new requirement for financial institutions in order to be classified as a SOFOM and access tax benefits. To this end, there will be a proceeding prior to incorporation of an entity whereby the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV) will issue – once it has analysed the information filed by the applicants – a decision to allow the incorporation to proceed. Once incorporated, the entity can be granted a definitive registration. Financial reform will provide these entities with a special registry for purposes of incorporation, thus offering greater organisation to professional lending institutions that seek to operate in this capacity and to obtain the tax benefits to which these institutions are entitled. In cases whereby a SOFOM must be considered a regulated corporation, it can incorporate those financial companies and savings and loan institutions in which it has an ownership relationship, as well as those cooperative savings and loan associations, and banking institutions. Those SOFOMs that issue debt on the securities market to finance their operations are also considered as regulated corporations. The powers of the CNBV and of the BdeM will be strengthened – and both have the authority to request information from SOFOMs. With respect to general deposit warehouses, a Single Registry of Certificates, Warehouses and Goods has been created as an agency of the Ministry of Economy. Registry certificates, pledge certificates, transactions with such certificates, and warehouses will be recorded, among other items, which, when implemented, will replace the registration of warehouse receipts by individual warehouses. 4. Development banking system: making the legal framework governing the Development Bank more flexible in order to contribute to further growth of the financial system and strengthen its own institutions. Article 75 of the Financial Institutions Law outlines conditions for development banking institutions which may invest in companies. Article 75(III) states that in the event of investments greater than 15% of the company’s capital stock for periods of more than three years – specifically involving “companies developing new long-term projects” – authorisation from the CNBV is required; however, the second paragraph of Article 75 sets out that when investments by development banking institutions are carried out in companies realising “development activities”, authorisation must be from the Treasury Department, which will determine what activities are “development activities”. This is in order to provide greater legal certainty to indicate those cases where the development banking system may make these investments. In addition, creating the obligation to grant loans – bearing in mind the viability of the loan and the security available for the loans – to those sectors of the population that do not have access to financial services will mean greater risk for the development banking system, but will increase accessibility of this sector to loans. 5. Savings and loan sector: development of the savings and loan sector, especially savings and loans financial institutions, community financial institutions and cooperative savings and loan associations, will be promoted through the incorporation of mechanisms to expand their coverage and participation in financial transactions carried out in other financial areas. The financial reform takes into consideration that such institutions may contract with third parties for the provision of services, setting limits and establishing terms in the agreements to control the risk that this implies. The possibility that popular financial societies (“sociedades financieras populares”), also known as SOFIPOS, may carry out transactions and contract services with their customers via electronic media is also contemplated. The CNBV, through the supervision of these services providers, will ensure that there is fair competition and services contracted for are in line with the law. 6. Credit unions: financial reform seeks to adapt the law to the reality of the market and offers a legal framework to strengthen the development and competitiveness of credit unions. The possibility of financing credit unions by government agencies and other credit unions with larger capital is established. New economic activities whereby credit unions can take part have been created, which has led to a greater number of people who may become members. A new concept of business experience has been introduced as a requirement for being a member of the board of directors of credit unions. The extension of the size of loans that credit unions may grant to their members, ensuring these will be made following a process having legal certainty, will encourage bridge loans for housing and reduce delays in obtaining housing. The possibility that credit unions could be capitalised via the issuance and subscription for preferred shares in order to boost their growth and positioning in the sector is contemplated, offering legal and financial certainty to investors. 7. Realising on security: increasing legal certainty for parties involved in loan agreements, particularly in realising on security and in reorganisations, and in the strengthening of commercial insolvency proceedings. Agreements entered into force by the Federal Consumer Protection Agency or the CONDUSEF in conciliation proceedings are included as documents to start an action. The restriction against the trustee and beneficiary in a guaranty trust agreement being the same person has been removed. The possibility of foreclosing on a pledge of cash is contemplated without the need for an enforcement proceeding or a court order. The process for carrying out proceedings in commercial actions begun by financial institutions will be accelerated, including mechanisms for securing goods, thus adding to legal certainty. 8. Foreign investment: removing limits to foreign investment in financial institutions. 9. Commercial insolvencies: certain procedural changes have been made, such as a provision prohibiting a judge from extending time periods set forth by law, establishing the possibility of proceedings before insolvency, provided that insolvency is proved to be imminent, as well as the possibility of emergency loans to maintain the company’s assets. Several provisions of the Commercial Insolvency and Bankruptcy Act have been amended to expedite commercial insolvency proceedings. The use of other forms prepared by the Federal Institute of Insolvency Specialists is introduced to expedite filing actions and other motions during the proceedings. The obligation to file a proposal for a preliminary agreement for payment to creditors and the concept of the preservation of the business has been established, as well as corporate agreements in commercial insolvencies in the event the insolvency is of a corporation. A prohibition to extend the conciliation period set forth by law is established. Facilities for contracting “emergency loans” are granted during the insolvency proceedings in order to avoid abuses in granting such loans. The possibility of a group commercial insolvency involving entities belonging to the same group is covered under the financial reform, which sets out new types of proceedings for the liquidation of banks. 10. Securities market: the financial reform explicitly states that privately offered securities are not allowed to be publicly offered. The person who may act as investments advisors is not as restrictive as it used to be. Brokerage firms are being supervised on a larger scale as new obligations are imposed when they act as securities underwriters. 11. Investment funds: innovation and increasing flexibility of the concept of investment funds by adapting them to the situation of the investors who use them, updating them via the creation of a stock corporation similar to stock exchange companies. The process to create investment funds has been modified, such as the authorisation procedure and corporate structure, in addition to new rules to the corporate governance of mutual funds, mutual fund marketing firms, and mutual fund rating companies.

2012 LABOUR REFORM: The Federal Labour Law was enacted in 1970, and apart from amendments made to certain procedural aspects in 1980, there had not been substantial changes until November 2012 when a reform was published in the DOF and came into force in December 2012. The labour reform incorporates the concept of “decent work”, which relates to the dignity and treatment of all employees, as well as the principle of non-discrimination outlined below and the right to social security for all employees.

When it comes to equal employment, terms for similar or analogous work, the same employment conditions should apply. No difference should be made by virtue of ethnic origin, nationality, gender, sexual preference, age, disability, social condition, religion, political opinions and/or marital status. New provisions for the protection of women are included such as those dealing with maternity periods, prohibiting pregnancy testing prior to hiring, sexual harassment, dismissals while pregnant, and others. Paternity leave was included for the first time: new fathers will be able to enjoy a paid leave-of-absence of three days.

In the event that the labour authorities find any minors aged 14 years or less at work, they may order the minor to terminate his or her work and the employer will incur a fine equal to $300-$25,000.

Employment relationships for a definite, indefinite and specific job are unchanged. Seasonal employment and initial training, meanwhile, have been added. In this regard, labour law will also recognise three new kinds of employment contracts: for a trial period of no more than 30 days for regular employees and six months for management or technical positions; for initial training and teaching for a period of no more than 90 days for regular employees and six months for management or technical positions; and for seasonal work. The concept of telework is incorporated as long as communications and information technology is involved.

The labour reform also introduces outsourcing provisions. The concept of outsourcing is defined for the first time in labour law as the sub-hiring of personnel in order to do work for the beneficiary of the services. However, the following requirements were included in order to be able to consider outsourced services to be properly contracted: the services cannot cover the entirety of the business of the company; they cannot be similar or analogous to work already done by the company’s own employees; and the reason for contracting outsourced services must be clearly justified. Should any of the aforementioned requirements not be complied with, the beneficiary of the outsourced services will be considered for all labour and social security legal purposes as the employer of the personnel providing the outsourced services.

Further, the reform also addresses the promotion of preferential rights: in order to promote one employee over another the employer is obligated to favour the employee who finished compulsory education, was adequately trained for the job, and had displayed a better attitude. The law before the amendments in question only covered wages and salary paid in cash, but after the labour reform came into force, payment through bank deposits, checks, debit accounts, electronic transfers or other electronic methods is now possible. The amount to be paid to the beneficiaries of a deceased employee has risen to $25,000.

The following additional grounds for dismissal with cause have also been included: violence against the employer’s customers and/or suppliers, unless the employee was taunted; sexual harassment; and lack of documentation required by Mexican legislation in order to carry out certain activities. There are also new grounds for the employee to leave his/her employment: the employer during working hours, or any of its relatives or representatives, behaving dishonestly or engaged in violence, threats, sexual harassment, mistreatment or any other similar or analogous conduct against the employee, spouse, parents, children or siblings.

For the first time, technologically related evidence may be considered as proof in labour-related proceedings such as audio and video recordings, faxed documents, e-mail transmissions, electronic signatures, and in all general information produced by technology devices and related information. In addition, conciliation officials are now contemplated. Only qualified lawyers or law students will be able to take part in labour trials; all officials of conciliation and arbitrations boards will have to be certified professionals; a new summary proceeding is included; the amount for fines incurred for labour related breaches is raised from 350 to 5000 days’ minimum general daily wages.

The upgraded labour reform also addresses back-pay arising from labour trials. A cap of 12 months is placed on back pay, starting from the date of the alleged dismissal. From the 13th month onwards, an interest rate of 2% per month will be payable for the unpaid amount.

Provisions relating to union transparency, which were included in the initial law sent by the president, were not approved by Congress and thus union-related provisions remain the same at the time of publication.

OBG would like to thank Basham, Ringe y Correa for their contribution to THE REPORT Mexico 2014

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The Report: Mexico 2014

Legal Framework chapter from The Report: Mexico 2014

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