In 2016, Mexico did not see much legislative work directly relating to business development. Congress has been active in other very important areas relevant to the development of the country and the rights of its population, including human rights, rights to protect women from abuse, anti-corruption and others. That is not to say that there has not been movement at various levels of the federal government aimed at promoting business, security and transparency. Additionally, Mexico has also signed the Trans-Pacific Partnership, which should become effective in early 2018 at the latest.
Below, we detail a number of the governmental actions which are relevant for business:
State and Municipal Financing
Following the 2015 amendments to the Mexican Constitution that empower the Federal Congress to legislate on matters relating to state and municipal public debt, the Federal Congress has issued a new Law on Financial Discipline for the federal entities and municipalities, which empowers the Federal Congress to create ceilings on financial indebtedness in states and municipalities. The Law on Financial Discipline is the legislative response to public demands for transparency, budgetary discipline and accountability, which emerged after a number of states accumulated inexplicable levels of indebtedness. Among others, the new legislation requires that all states and municipalities follow the same accounting, budgeting and financial standards for the incurrence of debt, and provides significant powers to the Federal government to block certain indebtedness to curb abuses and protect the system. This will bring about the traditional discussion of concentration of power at the federal level which, in the view of a number of sectors, could be abused for political purposes. Although it will be difficult to strike a balance of powers, recent examples show that the system is not prepared to permit states and municipalities to contract debt at will. In the months to come, we will see if in addition to the legislative action, the Federal government conducts criminal investigation against former state and municipal officials who have apparently mismanaged public funds.
Following the 2014 constitutional reform and the different rounds of bids for investors to participate in exploration and production activities of hydrocarbons, additional actions have been taken to carry on the energy reform. For example, in upstream activities, PEMEX now has the possibility, subject to strict standards, to migrate the oil fields that it had been assigned by the Federal government for the exploration and production of hydrocarbons to production contracts with the private sector. For such purpose, it was necessary to strengthen the regulatory framework for investors and, as a result, there are (i) new guidelines relating to the procedure to enter into joint ventures for the exploration and production of hydrocarbons, (ii) technical guidelines, and (iii) rules relating to drilling of oil wells, which were essential to provide a more reliable framework for private investors and PEMEX. In midstream activities, there are regulatory changes being made to open the natural gas market including rules for firsthand sales of natural gas to counter the influence of PEMEX in this sector in order to create an open market of natural gas. Among others, there are rules to guarantee private investors access to the national pipeline and warehouse systems so they can compete effectively with PEMEX. With regards to the electric sector, the different agencies are working on the creation of the Electric Wholesale Market and, for such purpose, there have been more than 44 regulatory instruments issued to foster the creation of this market.
Mexican MLP or Fibra E
At the end of 2015, the Ministry of Finance launched the rules for the creation of Mexican MLPs directed to promote investment in an array of energy, electricity and infrastructure areas through the creation of trusts that will issue trust certificates to be traded on the Mexican stock exchange, and which may also be offered abroad. The Mexican MLPs were structured similarly to real estate FIBRAs (the Mexican equivalent to the US REIT) to follow on their success. In April 2016 the Ministry of Finance amended the rules for Mexican MLPs to clarify a number of matters and specifically to spread over 7 years the recognition of taxable income resulting from the contribution of qualified assets to the MLPs which, in the original rules, did not provide any tax incentive or deferred method for such contributions. Additionally, the April amendments facilitate the use of the Mexican MLP as a growth instrument for investors in the energy, electricity and infrastructure businesses, and not only as a monetisation vehicle as it was originally conceived. For some time, there have been talks about the launch of the MLPs of PEMEX and CFE (the Federal Power Commission). While the IPO of any such MLPs would send a very important message to the market, the work preceding the IPO for each of those companies will not be done expediently, and it is more likely that the MLP created by a private sponsor in certain infrastructure areas be launched prior to the MLPs of PEMEX or CFE. The delay in seeing the first Mexican MLP should not be viewed as a failure of the structure; the preparatory work relating to assets that are subject to governmental permits or concessions, usually with security interests in favour of lenders and, in many cases, owned by joint ventures, is not a simple task.
This administration has been working on different fronts trying to increase the number of people who can access financial services. This policy intrinsically recognises many of the lags that have hindered the development of millions of Mexicans and the handicap posed on them for the lack of access to financial services. If people cannot access basic financial services, they will continue to be marginalised from development and opportunities. The government is working to facilitate access to financing for individuals through the use of technology. Obviously, banks will have to use their own underwriting standards but, for example, just in the housing system administrated by INFONAVIT (the National Housing Institute) between July 2016 and December 2017, it is expected that more than the equivalent in pesos of USD3 billion will flow to some of the most disadvantaged sectors of the population to improve or grow their basic houses. Access to financial services through internet in Mexico is growing at a rate of more than 80% per annum and access through mobile devices is growing at a rate of more than 180% per annum, which presents major opportunities for financial providers.