Regulations or legal aspects demanded by the Infrastructure development in Mexico

Regulations or legal aspects demanded by the Infrastructure development in Mexico

Regulations or legal aspects demanded by the Infrastructure development in Mexico

No one can deny that Infrastructure is a key element in any country’s economic development, especially in developing countries that have strong needs. Infrastructure development determines the growth rate of a country and its population’s well being. It also has a direct bearing in jobs generation and productive chains, in triggering economies of scale, as well as in companies’ competitiveness.

Roads, bridges, tunnels, public transportation, airports, ports, railroads, water treatment plants and waste disposal plants, tourist complexes, telecommunications, housing, correctional facilities, hospitals, as well as electric power generation, represent some ways in which the infrastructure in a country is shown.

Due to their nature, such projects: (i) involve a long time for their planning, implementation, development, and operation; (ii) require outrageous amounts of public and/or private investment; (iii) are risky; and (iv) bring along sensible and complex subjects such as the environmental and social matters, and therefore they require all the players or participants (including the Government, financial experts, investors, creditors, developers, suppliers, operators, consultants and society in general) who have different risks and interests – but not for that reason irreconcilable – to cover, to have a legal framework to provide full certainty, security and feasibility to the projects.

When speaking of regulations or legal challenges for the development of infrastructure that Mexico needs, it should not be interpreted as if the country does not have, nor that it is in a precarious situation regarding, a legal frame- work to allow infrastructure development. On the contrary, even though it can be improved, as many other things in this country, the legal framework, especially regarding the federal field to which this article refers to, has been improving recently, beginning its triggering with the arrival of the North American Free Trade Agreement NAFTA.

So much so, that some projects, such as the Atotonilco Treatment Plant (the largest in Latin America), Túnel Emisor de Oriente (storm water drainage tunnel), MEXSAT system (Mexican new generation telecommunication system), supporting trust funds for the rescue of Conces- sion-Operated Highways (FARACs), Suburban Train (System 1), Highway Interchange Systems, Arco Norte Highway, wind farms in Oaxaca and Baja California, have become a reality. In fact, most of these projects, which could have been considered as monumental, are now tangible.

Surely, there are some iconic cases, such as the alternative airport in Texcoco (during Vicente Fox’s term), Punta Colonet mega-port in Ensenada, the Bicentenario Refinery, the Riviera Maya Airport (which hopefully will soon be awarded) or La Parota Dam of the Federal Electricity Commission (CFE), which due to some aspects that are beyond regulations for projects’ development, such as social, political, environmental, commercial, financial crisis, inexistence of the rule of law or simply faulty management – lack of foresight, inexperience, good consultants, clumsiness – are halted, suspended and bring about unnecessary risks or simply scare off those possible investors and financial experts, which in turn, affects society.

In order to back up what we have at present in the regulation or legal aspects for the infrastructure development in Mexico, we deem necessary to talk about three main aspects: (i) the projects themselves (what do we need, where are we going, when do we want it, how do we do it, how should we finance it, who do we do it with); (ii) the regulatory framework and lastly, (iii) the financing.

In this sense, the Federal Government, being aware of the great diversity of ideas, opinions, skills, and interests, as well as of the responsibility to become, due to our privileged geographic location, a great power as far as communications and logistics are concerned, created the National Infrastructure Program 2007-2012 (PNI, according to its initials in Spanish). The abovementioned document sets forth the objectives, challenges, goals and actions to be propelled by the Federal Government concerning infrastructure as a trigger for national development, with more than 300 projects.

Even though the PNI has not reached the expected progress (there are some current reports that indicate a 50% progress, and show that it will only reach 70 – 80% by 2012), which has caused uncertainty for markets as well as for investors, the fact of having detected and given priority to certain projects in different areas, with different investment amounts and risks, and having tried to give the country some direction, especially in the long term (planning), is praiseworthy.

It is not news that some of the causes that have determined this delay of the PNI are beyond our control, such as the financial crisis; however, it is also true that there are also some internal causes, such as sub-exercises, deficient tax collection, and political interests. Another determining factor has also been the lack of confidence of the private sector, a mainstay of PNI.

Yet, what has been done regarding the regulatory framework?… Thanks to NAFTA and the subsequent treaties, as well as PNI, “regulatory improvements and roadblocks” were established, and legislation and criteria were concentrated and standardized. Even recently, by means of the Administrative Agreement by which Federal Public Administration departments and entities, and the Procuraduría General de la República (General Attorney’s Office) are instructed to refrain from issuing any regulation in the indicated matters, such departments and entities, as well as the Procuraduría General de la República, PGR, were specifically forbidden from issuing additional regulations to those issued by the Secretaría de la Función Pública (Ministry for the Public Administration), regarding public works and related services, as well as public sector’s acquisitions, leases and services.

Moreover, in order to make these regulations more clear and to avoid dispersion: (i) on May 28, 2009, the Law on Acquisitions, Leases and Services for the Public Sector was amended, on July 28, 2010, its New Regulations were issued, and in August 9, 2010, the Administration Handbook for the Public Sector’s Leases and Services was issued; (ii) on May 28, 2009, the Law on Public Works and Related Services was amended and its New Regulations were issued on July 28, 2010, and also in August 9, 2010, the Administration Handbook for Public Works and Related Services was issued; and lastly, (iii) on September 9, 2010, the Administrative Agreement contemplating different guidelines related to acquisitions, leases and services, and public works and related services, was enacted.

In regards to acquisitions, leases and services, several regulations and laws were put together, abrogated and repealed; new concepts such as “framework contracts”, subsequent offers, long-term service rendering (PPS), social witnesses and electronic, in-person, and mixed tenders, were included; now, MIPYMES (Micro, Small and Medium-sized Businesses, according to its initials in Spanish) participation is encouraged and protected, the COMPRANET system was improved and updated, and the possibility of arbitration in PPS contracts is contemplated (under the Law on Acquisitions, Leases and Services for the Public Sector – LAASSP).

In turn, regarding works and related services, it has been determined that the Government has the obligation, “previously to carrying out any works, to process and obtain from the relevant authorities, the necessary reports, permits, licenses, rights for raw material banks, as well as property or property rights, including the right of way and real property condemnation on which public works will be performed, or in its case, the rights bestowed by whoever may have their legal disposal”, being this is a key factor for any investor, financier and creditor, taking into account that the right of way represents an obstacle in most of the infrastructure projects. On the other hand, public international tenders under FTAs coverage were differentiated from open tenders; the “legal, technical and economical solvency” concept substitutes the “economically more convenient” notion; the cost adjustment procedure is clarified and detailed; assumptions for reducing the performance guarantee percentage are now considered in accordance with supplier and contractor records; administrative recourse procedures have been expedited and simplified, and the time for solving them is reduced; and, the possibility to include arbitration in the contracts is contemplated, as well as other alternative means for dispute resolution (under the Law on Public Works and Related Services – LOPSRM).

In addition to the aforementioned, but specifically regarding hydrocarbons exploration and exploitation, despite the reluctance from some “nationalists” and certainly some politicians, Pemex New Law and its regulations, along with the Contracting Administrative Regulations with Petróleos Mexicanos (Pemex) and finally the new Integral Contracts for Exploration and Production (already approved by the Supreme Court, publishing the first tender on March 1, 2011), prove our will to make Pemex a more transparent company, with real corporate governance, which, among other things, may allow a better management; providing a course of action and making it more attractive for investors in debt markets; likewise, it will become, based on its strategic productive activities, more versatile and global, competing for attracting the most sophisticated investors to develop its infrastructure projects under circumstances that comply with international standards of professionalism, flexibility and enforceability. This new contracting model represents an excellent step forward, although there is big room for improvement provided political times allow it.

All of the above, without mentioning the APPs in its different levels, including under the concession scheme and the PPS contracts under special laws, as the Law on Highways, Bridges and Federal Transportation, and the Law on National Waters, that have successfully allowed the development of major and recent projects (FARACs, the Atotonilco Treatment Plant).

On the other hand, regarding financial and stock market matters, it is worth mentioning the creation of mechanisms that tend to finance infrastructure projects, such as the possibility for Pension Fund Administrators (AFORES), to participate in the Mexican Stock Exchange (BMV) through CKDs (Development Capital Certificates), which are mostly destined to infrastructure development. Likewise, the Infrastructure National Fund (FONADIN), an instrument that was created to support PNI, has been a key for project funding, as it was the case of FARACs or water treatment plants, absorbing risks that the market is not willing to take, especially as it happened during the 2008 and 2009 crisis (supporting venture capital funding, granting financing or issuing guarantees) or even investing in funds, such as FIMM (Macquarie Mexico Infrastructure Fund). Moreover, the so claimed new APPs Law will surely help to achieve better financing since the APP scheme has proved to be bankable because, among other advantages, it allows for risks to be more easily identified, al-located and assessed and therefore, controlled. Even with respect to financing at the level of States and Municipalities, we more frequently hear about securitization operations; the States and Municipalities know that the easiest and cheapest way to obtain financing is through the Mexican Stock Exchange; they could even use this mechanism to cancel or repay credit liabilities with commercial banks, which is more expensive. These structured finance mechanisms allow them to generate resources for their own projects without imminently depending on federal contributions (participaciones federales). Under a separate matter, it is not in question that the procedures for bidding, awarding and contracting of infrastructure projects require now greater competitiveness, transparency, equality, diligence and opportunity. An example of this has been the introduction of new regulations, such as the Federal Law on Transparency and Access to Public Government Information, which, along with different institutions such as the Federal Institute for Public Information Access (IFAI) and information instruments such as the INFOMEX system, have allowed the public to have access to information which, was not possible before, therefore achieving greater confidence and knowledge of the public administration’s core and of their contracting and accountability. Nevertheless, there are opportunity areas to develop to provide even greater transparency, contributing to mitigate favoritism and corruption when awarding contracts, and sanctioning in a more effective way, those companies and their employees who incur in unlawful practices when doing business with the public sector, as well as the respective public officers.

Now, in spite of these efforts in the regulatory arena, there are others still pending that are also material for infrastructure development and that for political reasons have not been crystallized despite the long time in which our legislators have “worked” on them. As an example of one of them, we deem important to mention the Law on Public-Private Partnerships, on which, our legislators have been working since November 2009.

Since Mexican Government is basing a great part of Mexico’s economic development in infrastructure projects such as highways, hospitals, education, drinkable water and sanitary drainage, etc., it is difficult to accept the fact that there is not a Federal Law on Public-Private Partnerships, that provides more certainty to the State and especially to the private parties allowing them to continue joining efforts for the development of social projects, allowing the State to adequately provide public services, and the private investors to obtain returns from their investments and operations.

Public-Private Partnerships (APPs) are “forms of long-term investments, where techniques, risk allocation, objectives, and resources between the private sector and the Government are incorporated, with the purpose of creating or developing productive infrastructure or the rendering of public services”1.

In Mexico, even though some States, such as Nuevo León, have already set an example, and that the majority of the infrastructure projects are carried out under an APP scheme (to a lesser or greater extent), the Federal Congress has not approved the new Law on Public-Private Partnerships yet (the House of Representatives as the auditing commission). Regulations of the Ministry of Finance (SHCP) and the corresponding regulations in, among others, the Law on Acquisitions, Leases and Services for the Public Sector, or in special laws (such as the Law on Highways, Bridges and Federal Transportation), or the plain contract framework, could be insufficient, rigid and generate confusion and uncertainty, inhibiting the creation of more projects and investors’ attraction.

This new law pretends to boost the development of new infrastructure projects, encouraging public and private investments to meet the growth needs of the population in different regions, as well as to promote employment and a responsible economic growth. The frameworks of APPs pretend to satisfy community needs, looking for equitable risk allocation between the public and private sectors through flexible mechanisms, which turn into a great variety of forms, depending on the needs of each project.

Thus, the private sector becomes a service supplier for the Federal Public Administration, and it is directly compelled to build the necessary infrastructure for rendering such services when required. The innovation in this approach is that the State will enter into a contract to receive a service from the private sector, and not to purchase fixed assets, and they will be carried out according to agreed performance levels.

Another subject that represents an important challenge for infrastructure development in Mexico relates to the fact that more than 50% of the national territory is under agrarian land ownership system, regulated mainly by the Agrarian Law. Shortly before the entering into NAFTA, Carlos Salinas de Gortari, President at that time, complying with investment and development demands, negotiated amendments to this Agrarian Law to recognize, among others, plot distribution property rights, their disposal and their resulting disincorporation towards becoming private property, to allow their use by a third party, as well as partnerships with a third party and granting usufructs, among other matters. This was a big step at the time, but it needs updating and upgrading, even regarding the way justice is procured, to allow a more agile and secure way to invest in mining, real estate, touristic or wind farm infrastructure projects to be developed in agrarian lands. It is very common to listen to investors negotiating about the occupation or disincorporation of agrarian lands, but that as soon as economic circumstances change, or when the community leaders so decide, the projects are simply stopped or access to them is impeded and/or investors are blackmailed. While the subject is related to having better tools to regulate the use, occupation, exploitation, and/or disincorporation of agrarian land, we return to the matter of a true rule of law that protects those who stand to reason. In this sense, the acts of the authorities need to be more binding, efficient and expedite. Notwithstanding the foregoing, the need for, and today’s relevance of, this law deserve revision, taking into account the spirit that gave birth to it and the current uses, benefits and tendencies.

To conclude, from a merely regulatory perspective, we consider that those legal instruments we can count on today are generous and allow the development of different kinds of infrastructure projects, in their different modalities and levels. It is true, all of them can be improved and perfected, that is the challenge. Based on their nature, some areas, such as hydrocarbon exploration and exploitation, require more development and nimbleness, but once again, we depend on the political will to allow the development of these projects, which our country desperately needs; another great challenge.

We wish to applaud the Law on PublicPrivate Partnerships, which needs to be promptly approved and enacted to grant greater legal certainty to the projects. Once this APPs Law becomes part of our legal framework, more flexible and creative schemes could be successfully implemented to develop infrastructure projects.

We have to wait and see the way the House of Representatives, as the auditing commission, will revise the project approved by the Senate.

Lastly, we emphasize the fact that other factors, not related to the regulatory framework, regarding the development of projects and infrastructure, need to improve substantially. That is the case of the social aspect that goes hand in hand with the “social responsibility”, the rule of law, and work fast and efficiently on related subjects such as safety and corruption, as well as in the adequate charges for fees and services in communications, transportation and water services, among others. This will enable the development of the infrastructure projects our country needs or wishes to attract, such as the case of Punta Colonet which at present competes against other investments for enlargements at the Panama Canal and at some East Coast ports in the United States, and therefore, nowadays, its viability results arguable. We must leave behind the image of an “underperformer” country regarding infrastructure. These challenges look complicated now that Mexico is fully on a political-electoral stage.

1 Estudio sobre la Constitucionalidad de la Ley de Asociaciones Público Privadas. Instituto Belisario Domínguez del Senado de la República. Dirección General de Estudios Legislativos: Política y Estado. Junio de 2010.

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