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Competitiveness in the Mexican Market. US / EUROPEAN NETWORK November 21, 2005. Overview. Roberto Arena. Overview. General Information on Mexico Population: 103.8 Million people GDP: 676.5 Billion USD GDP Growth: 4.4% Exports of Goods and Services (GDP%): 30.1

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slide1

Competitiveness in the Mexican Market

US / EUROPEAN NETWORK

November 21, 2005

slide2

Overview

Roberto Arena

slide3

Overview

General Information on Mexico

  • Population: 103.8 Million people
  • GDP: 676.5 Billion USD
  • GDP Growth: 4.4%
  • Exports of Goods and Services (GDP%): 30.1
  • Imports of Goods and Services (GDP%): 32.2
  • Foreign Direct Investment: 10.8 Billion USD

Source: World Bank

All data is referred to 2004, except for foreign direct investment, which is referred to 2003.

slide4

Overview

Main competitors in the international arena:

  • Brazil
  • China
  • India
slide11

Overview

Some actions taken:

  • 11 Free Trade Agreements (+40 Countries)
  • 19 Double Taxation Treaties in force
  • 18 Double Taxation Treaties in formalization processes or under negotiation
slide12

Overview

Some actions taken:

  • 18 Investment Protection and Promotion Agreements
  • 3 Investment Protection and Promotion Agreements under negotiation
  • Undertaking substantial deregulation processes
slide13

Overview

Growth Competitiveness Index

Country 2004 2005 Variation (2004-2005)

Finland 1 1 ---

United States 2 2 ---

Sweden 3 3 ---

China 46 49 -3

India 55 50 +5

Mexico 48 55 -7

Brazil 57 65 -8

Source: World Economic Forum

slide14

Overview

Hot Legal Topics:

  • Hospitality Industry
  • Labor
  • Fiscal
  • Competition Law
  • Piracy / Contraband
  • Limitation of liability under procurement contracts
  • Natural Gas Market
slide15

Hospitality Industry

Alejandro Ortiz

slide16

Hospitality Industry

Agenda:

  • Quick Snapshot of Hospitality & Leisure Industry in Mexico
  • Legal Framework
  • FONATUR’s Role
slide17

Hospitality Industry

Quick Snapshot of Hospitality & Leisure Industry in Mexico

slide18

Hospitality Industry

  • According to SECTUR, Mexico’s tourism promotion agency, there were 20.6 million international tourism arrivals in 2004.
  • Mexico occupies the eighth place on the World Tourism Organization’s list of most visited tourist destinations in the world.
slide19

Hospitality Industry

  • With over 376,450 hotel rooms, the World Travel & Tourism Council reports that the travel and tourism industry generated approximately 73.3 billion USD of economic activity in 2004.
  • This demand is expected to grow by 7.1% per annum, in real terms, between 2005 and 2014.
slide20

Hospitality Industry

  • The industry is expected to contribute 2.7% to the Gross Domestic Product in 2005.
  • In 2004, employment in the broader tourism sector was estimated to encompass 2,865,700 jobs, representing 10.0% of total employment.
  • Capital investment in the sector was estimated at 14.7 billion USD or 10.8% of total investment in 2004. By 2014, this should reach 43.2 billion USD, or 11.1% of total investment.
slide21

25,000

22,169

21,864

20,000

17,517

16,156

15,000

11,099

Room Supply

10,480

8,259

10,000

7,118

6,378

6,269

5,000

-

Mexico City

Cancun

Acapulco

Guadalajara

Puerto Vallarta

1995

Hospitality Industry

Number of Hotel Rooms Gran Turismo, Five-and Four-Star Hotels Selected Cities in Mexico, 1995 compared to 2004

2004

slide22

Hospitality Industry

Occupancy & Average Daily Rates

Selected Cities in Mexico 2004

slide23

Hospitality Industry

Legal Framework

slide24

Hospitality Industry

  • Restricted zones – 100 kilometers from the Mexican border and 50 kilometers from the coastline
  • Beach concessions
  • The figure of trust for real estate projects
  • Role of Notario Público
slide25

Hospitality Industry

  • Registry System
  • Ejidos
  • Environmental issues
  • Lease vs management agreements
  • Title Insurance
slide26

Hospitality Industry

  • Gambling
  • Recent court decisions having an impact on the hotel industry:

a) Calculation of mandatoryprofit-sharing

b) Discretional faculties of SEMARNAT

* Environmental risks

* Temporal or permanent suspensions

c) Labor liability derived from outsourcing

slide27

Hospitality Industry

FONATUR’s ROLE

Institution that promotes tourism projects through consulting services, financing programs, and sale of real estate

slide28

Hospitality Industry

  • Mexico has one of the most stable, open and deregulated developing economies in the world, and it currently has the highest proven level of foreign reserves, totaling 51 billion dollars. The world’s three leading credit rating agencies have given Mexico investment grade status, upgrading the nation’s sovereign debt to long-term foreign currency debt guaranteed by the state.
  • FONATUR has developed five Integrally Planned Resorts (IPRs): Cancun, Los Cabos, Ixtapa, Loreto and the Bays of Huatulco, seaside resorts that today enjoy worldwide recognition and competitive advantages over other national and international tourist destinations, such as having a Master Plan, urban-resort planning mechanisms, an Annual Construction Program operated by FONATUR and an Annual Maintenance Program operated by its affiliate, Baja Maintenance and Operation (Baja Mantenimiento y Operación, BMO).
slide29

Hospitality Industry

  • Serving as a determining factor in the growth of the tourism sector and its future outlook, FONATUR has over a period of 30 years developed tourist destinations that have contributed significantly to boosting overnight tourism to Mexico six-fold.
  • The five destinations developed by FONATUR together offer more than 245 hotels and more than 36,800 rooms, with occupancy rates that reached 61.7% in 2002, or 7 percentage points above the country’s other beach resorts.
slide30

Hospitality Industry

  • These five destinations are examples of developments that spark regional growth. In 2002, the states of Quintana Roo and Baja California Sur, where Cancun and Los Cabos are located, ranked in 4th and 8th place respectively in per capita GDP.
slide31

Labor

Eduardo Pizarro-Suarez

slide32

Labor

  • “Static” and “Social” elements that characterize Latin American Labor Laws.
  • Basic Principles under Mexican Labor Law:

- Minimum Benefits

- Burden of Proof

- Interpretation of Law

slide33

Labor

Minimum Benefits under Mexican Law:

  • Mandatory profit sharing
  • Social Security
  • Minimum Wage
  • Overtime
  • Vacation and Vacation Premium
  • Christmas Bonus
  • Termination Rights
slide34

Labor

Recommended Hiring Practices in Mexico:

  • Screening of Candidates
  • White Unions
  • Trial Period and Temporary Employment
  • Independent Contractors
slide35

Labor

  • The Written Rule
  • Internal Employment Regulations
  • Employment of Foreigners
  • Service Company
  • Resignation Scheme
  • Confidentiality and Intellectual Property
slide36

Labor

Proposed Amendments to the Mexican Labor Law:

  • Hiring Flexibility
  • Burden of Proof
  • Termination Provisions
  • Unions
slide37

Fiscal

Jorge San Martin

Fernando Camarena

slide38

Fiscal

  • Along with other changes to legal frameworks, Mexico needs structural tax reforms to trigger its economic development.
slide39

Fiscal

  • SCOPE OF THE REFORMS
    • Broadening the tax base
    • Tax culture (fiscal discipline)
    • Legal framework
slide40

Fiscal

  • BROADENING THE TAX BASE
    • Informal business activities
    • Mexico’s tax system: full of complications
slide41

Fiscal

  • TAX CULTURE
    • Trust in the government (expenses)
    • Red-tape
    • No real incentives
slide42

Fiscal

  • LEGAL FRAMEWORK
    • General description of the system
    • Lack of efficiency
slide43

Fiscal

  • INCOME TAX
    • Mexican vs International rates
    • System full of exceptions
slide45

Fiscal

  • VALUE – ADDED TAX
    • Mexican vs International rates
    • System full of exemptions
slide47

Fiscal

  • PROPOSAL

Income Tax

      • Rates reduction
      • Elimination of exemptions
slide48

Fiscal

  • VALUE – ADDED TAX
    • Increase of rates
    • Elimination of exemptions
slide49

Fiscal

  • INNOVATIVE STRUCTURES
    • Pass – through entities
    • Holding companies
slide50

Competition Law

Marco A. Najera

slide51

Competition Law

  • Mexico has a Federal competition law system.
  • Mexican Constitution (Art. 28):

Mexican Government activities are not monopolies:

    • oil, hydrocarbons and basic oil derivatives (Pemex)
    • electricity, nuclear energy, railroads, postal serviceand telegraphs.
  • International Conventions (NAFTA, FTA with EU, etc)
slide52

Competition Law

  • Federal Law of Economic Competition (FLEC):
    • Enacted in 1993, after commitments assumed by Mexico under NAFTA.
    • Created the Federal Commission of Competition (FCC).
    • Brief and rather vague law requiring constant interpretation.
    • FLEC Regulates:
      • Monopolistic Practices

b) Concentrations

slide53

Competition Law

Secondary Provisions:

  • Regulations to the FLEC
  • Internal Regulations to the FCC
  • Criteria issued by the FCC’s Commissioners (scarce)
slide54

Competition Law

Monopolistic Practices Investigations

  • Prosecuted through investigationscarried out by the FCC, initiated by third party claims or by the FCC itself.
  • The procedure is conducted by the FCC, calling competitors and affected players to provide information on the case.
  • Procedure carried out in writing in the Commission (no interrogations).
  • No leniency.
slide55

Competition Law

  • No field investigations are allowed.
  • From six months to one year to be resolved.
  • Fines and criminal sanctions could be imposed, plus orders to suppress the practice.
    • Absolute Monopolistic Practices:
    • Horizontal - among competitors (e.g., cartels).
    • Nodominance is required.
    • Fines up to 1,500,000 USD.
slide56

Competition Law

  • Relative Monopolistic Practices:
    • Vertical – by economic agents not competing (i.e., suppliers, distributors, agents, etc.).
    • Dominance in the relevant market is required.

- Fines up to 900,000 USD.

slide57

Competition Law

Control of Concentrations

  • Thresholds to notify:
    • Combined thresholds: value of transaction, assets, turnover and shares of players involved.
    • To regard only Mexican figuresof the transaction and parties (as conglomerates).
  • Value of transaction

- Exceeding 50,000,000 USD.

slide58

Competition Law

b) Size of transferor + value acquired:

  • If assets or turnover of target exceeds 50,000,00 USD and more than 35% of target’s stock or assets are acquired.

c) Size of transferer and acquirer + value acquired:

  • Assets or turnover of both parties exceeding 201,000,000 USD.
  • Assets accumulated by purchaser exceeding 20,000,000 USD.
slide59

Competition Law

Notification process

- Purchaser shall notifyprior to the implementation in Mexico.

  • Notification involves a large amount of information.
  • After dossier is fully integrated, FCC resolves in 45 days + 60 days in complicated cases.
slide60

Competition Law

- If FCC does not resolve in deadline,the concentration is cleared.

  • The parties may decide to close and implement the transaction prior to obtaining the decision, if no harm to market exists.

- Decisions, excluding confidential information, are published by the FCC in website and gazette .

slide61

Competition Law

- FCC may impose conditions to approve a transaction which can be proposed by the parties.

- FCC may block a transaction and order the divestiture of the assets concentrated, control elimination and suppression of the operation (in Mexico).

  • Fine not exceeding 1,000,000 USD for incurring in anti-competitive concentrations.

- Fine not exceeding 450,000 USD for failing to notify prior to the transaction.

slide62

Competition Law

Challenge Procedures.

  • Appeal within the FCC.
  • “Amparo” (constitutional review) lawsuit.
  • No ordinary court procedure available
slide63

Competition Law

Proposed Amendments to the FLEC.

  • Improve description of anticompetitive practices
  • Current law grants FCC discretional rights to interpret cases of anticompetitive practices, which has caused various constitutional and illegality claims.
  • Leniency programs in cartel cases.
  • FCC able to practice inspections and field investigations.
  • FCC able to suspend the anticompetitive practice during the investigation stage.
slide64

Competition Law

  • Economic agents able to retract from incurring in an anticompetitive pratice and reduce sanction
  • Modify thresholds to notify a concentration
  • Simplify process to review concentrations not affecting competition
  • Reduce deadlines to resolve
  • Reduce information required to file a notification
slide65

Competition Law

  • Sanctions are increased to some extent
  • Reduce legal timeframe in appeals
  • Representation offices of FCC out of Mexico City.
  • FCC’s binding opinions :
    • New laws and regulations
    • Public bid processes
slide66

Competition Law

Pending Issues

• Effective sanctions, including amendments on criminal felony provisions

• Create court procedure dealing with legality

  • Specialization of judges and criminal prosecutors in competition matters

• Increase staff and budget of the Commission

slide67

Piracy / Contraband

Andres Alvarez

slide68

Piracy / Contraband

Differences:

  • Piracy: Infringement IP Statutes

- Enforcement: Mexican IP Institute

  • Contraband: Breach of Customs Statutes

- Enforcement: Customs & Tax authorities

slide69

Piracy / Contraband

Similarities:

  • Outstanding losses for companies

* SW industry lost 407 million USD in Mexico in 2004.

* Records, movies, apparel, wine & spirits, HW, books

slide70

Piracy / Contraband

  • Existing legal framework containing criminal sanctions and administrative fines:

* Contraband-- 3 months to 9 years

* Piracy-- 2 to 6 years

slide71

Piracy / Contraband

  • Enforcement:

* Investigations

* Police Operations (Operative Costs)

* Legal work

slide72

Piracy / Contraband

  • Lack of results (3-5 years to obtain a favorable infringement resolution, usually corresponding to low administrative fines)
slide73

Piracy / Contraband

Government Actions:

  • Special Congress Commission

* Created in 2004 (no record of their actions, if any)

  • Increase security
  • Special investigations
  • Far from desired results
slide74

Piracy / Contraband

Companies’ Actions:

  • Joint investigations (lower costs)
  • Education
  • Mass Media
slide75

Piracy / Contraband

Some thoughts:

  • Efficient enforcement (Sanctions for authorities)
  • Customs authorities to enforce IP related statutes
  • Specialized Courts
  • Expedite court resolutions
  • Increase sanctions
  • Coordination (Private & Government)
  • Joint Campaigns (Education & Incentives)
slide76

Procurement Contracts

Andres Alvarez

slide77

Procurement Contracts

  • Standard practice of Mexican government entities:

* No cap on liabilities derived from procurement contracts

  • Some companies discouraged from participating in RFPs.
slide78

Procurement Contracts

Legal framework:

  • Constitution
  • Public Acquisitions, Leases and Services Law
  • Law on Public Works and Services related thereto
  • Federal Civil Code
slide79

Procurement Contracts

  • Procurement statutes only provide the supplier’s obligation to guarantee its performance under the corresponding agreement.
  • No clear provisions on the extent of such guarantee.
  • Reference to calling entity’s procurement guidelines (Políticas, Bases y Lineamientos)
slide80

Procurement Contracts

  • Reference to the calling entity’s acquisitions committee
  • To the extent the calling entity’s procurement guidelines and acquisitions committee are silent, the Federal Civil Code becomes applicable
  • Federal Civil Code provides that contractual liability may be capped by entering into a contractual penalty clause
slide81

Procurement Contracts

  • A contractual penalty clause needs to be mutually agreed by the parties to the corresponding contract
  • Hence, liability under procurement contracts may be capped only to the extent the Federal Civil Code becomes applicable, and the corresponding calling entity’s officer agrees to such cap
slide82

Procurement Contracts

Catch:

  • Government entities’ officers are subject to a special liability regime provided in the Mexican Constitution and in the Federal Law of Administrative Responsibilities of Government Employees.
slide83

Procurement Contracts

  • Under the special regime, any act or omission of a Government officer that results in damage to the Mexican State’s finances (i.e., not being able to recover lost profits due to a cap on the liability of a procurement contract), may result in administrative fines equal to the corresponding lost profits, and even imprisonment.
slide84

Procurement Contracts

  • Mexican procurement statutes are deemed as “public order” statutes
  • Any waiver to agreed on provisions of “public order” statutes are deemed null and void
  • A cap on a procurement contract may be construed as a waiver of a “public order” statute, since government officers are bound to look after government interests
slide85

Procurement Contracts

  • Such obligation would imply the right to collect all damages arisen under a procurement contract.
  • A cap to such liability would prevent the calling entity to collect all damages arisen under a procurement contract
slide86

Procurement Contracts

Conclusion:

Although arguably possible, the agreement on a cap of liability under a procurement contract may be construed as a waiver to a “public order” statute; hence, deemed null and void.

slide87

Procurement Contracts

Possible action:

  • Amend the regulations to the procurement statutes in order to provide general guidelines that may be followed by calling entities in order to cap liabilities under the corresponding procurement contracts
slide88

Natural Gas Market

Daniel Aranda

slide89

Natural Gas Market

Overview:

- According to official information contained in the 2004-2013 natural gas prospective issued by the Mexican Ministry of Energy, during 2003, while the Mexican economy experienced growth of 1.3%, the natural gas consumption grew at a rate of 8.6% compared to the consumption rate of 2002.

- Since 2003, Mexico stopped exporting and began importing natural gas

slide90

Natural Gas Market

- Even though Japan is the world’s largest importer of natural gas, it is estimated that Mexico’s spread between its domestic production and the domestic demand will continue to increase continuously unless drastic investment is made to develop and exploit proved and probable reserves.

- It is also foreseen that in the next ten years the domestic demand for natural gas will experience growth at an annual rate of 5.8%, thus, passing from 5.2 Bcfpd to 9.3 Bcfpd in 2013.

slide91

Natural Gas Market

- Likewise, the decline in wells productivity, along with the high technical cost involved in certain regions versus the low productivity of same (Chicontepec), encourages Pemex to intensify the exploratory perforation and development of Burgos Basin and to increase inland and off-shore production in Veracruz. Thus, to set the limits of Lankahuasa field, as well as to build the necessary infrastructure to transport gas from that region to the Natural-Gas-Pipeline National Grid (Red Nacional de Gaseoductos) has become a priority.

slide92

Natural Gas Market

- To date, Pemex has already awarded 8 MSC with an estimated investment of 6.3 billion USD with an estimate production of 700 to 800 MCfd by 2008 which would be focused on the Burgos basin.

slide93

Natural Gas Market

- Mexico maintains a growing trend on the use of dry natural gas, which has resulted in converting Mexico in the tenth consumer of such natural resource. To date, Mexico’s natural gas reserves are distributed among 10 basins (e.g. Burgos, Salinas/Parras, Tampico-Misantla, Chicontepec, Lankahuasa, Salinas, Chapayal, Macuspana Campeche, and Offshore facilities) estimated as follows:

slide94

Natural Gas Market

- Currently the growth of natural gas demand has and is expected to continue to come from the power sector because such plants are using combined-cycle technology.

- To date, Pemex Gas has 10 gas processor complexes, 8 of which are located in the south-southeast region and the other two are in the northeast region.

slide95

Natural Gas Market

- To date, CRE has authorized 5 LNG terminals and expects to receive 2 more applications during 2005.

- Mexico’s transportation infrastructure is composed of the Natural-Gas-Pipelines National Grid and the Naco-Hermosillo system, both property of Pemex, with an extension of 9,043 km.

- According to Pemex information, its pipelines are currently saturated. Thus, Pemex has had to use other, more expensive alternatives in order to provide natural gas to its customers.

slide96

Natural Gas Market

Legal Framework:

- Article 27 of the Mexican Federal Constitution (the “Constitution”), under its sixth paragraph, clearly sets forth that the Nation has direct ownership over the oil and all solid, liquid and gaseous hydrogen carbides (jointly “Hydrocarbons”), expressly prohibiting the granting of concessions for their exploitation by private investors.

- Derived from the referred provisions, the Mexican Congress and the executive branch enacted the Regulatory Law of Article 27 of the Constitution in Oil Matters (Ley Reglamentaria del Articulo 27 Constitutional en Material del Petróleo) (the “Oil Law”) and its Regulations, respectively, which constitute the principal laws for Hydrocarbons.

slide97

Natural Gas Market

- The Oil Law clearly sets forth that the exploration, exploitation, production and first hand sales of natural gas are reserved to the Mexican government through the State-owned company Petróleos Mexicanos (“Pemex”) and its Subsidiaries.However, the Oil Law also provides that private investors can participate within the activities related to natural gas that the corresponding Regulations authorize.

- To such end, the Executive Branch issued the Natural Gas Regulations (The “NGR”), which provides the general legal framework for the activities that could be performed by private investors once they are duly authorized by the Energy Regulatory Commission (Comisión Reguladora de Energía) (“CRE”). Activities include natural gas storage, transportation and distribution.

slide98

Natural Gas Market

- Furthermore, the NGR set forth that the CRE may issue mandatory directives that would regulate safety, construction and prices standards that should be followed by all the individuals holding a permission to perform any of the referred activities.

- CRE permits are granted for a period of thirty (30) years and are renewable.

- It should be noted that the exportation and importation of natural gas does not require prior permission from the CRE, but is subject to the applicable provisions of the Customs Law and Trade Law. Thus, permit-holders are only bound to provide statistical information to the CRE in regards to their trade activities.

slide99

Natural Gas Market

Regulation of Prices:

- Natural gas prices are regulated in the Mexican market by the CRE.

- In principle, such governmental body, based on international standards assesses which would be a competitive price for first hand sales of LNG by making reference to the Houston Ship Channel in three particular regions of Mexico.

slide100

Natural Gas Market

- Last September President Fox decreed a cap on natural gas prices, temporarily suspending the regulated price mechanism. The preceding was due to the fact that since the unfortunate natural disaster of Katrina the prices went up 35%, passing from 7.25 USD to 9.88 USD.

slide101

Natural Gas Market

Challenges & Possible Solutions:

- Pemex is funded through the Federation’s Expenditure Budget (Presupuesto de Egresos de la Federación) which is a statute that is enacted on an annual basis by the Mexican Congress and that clearly obeys political interests. Thus, it is subject to yearly restrictions and limitations.

- Due to the current financial situation of Pemex (its equity balance, liabilities vs assets, and its tax regime), along with the yearly budgetary restrictions of the company’s legal framework, the company is unable to perform the necessary investments, or liaisons that are needed to expand its domestic gas production, strengthen its pipeline infrastructure, or to increase the number and capacity of its pipeline interconnectivity with the border and with LNG terminals.

slide102

Natural Gas Market

- Notwithstanding the preceding, Pemex in an effort to increase such exploration and production capacity developed in the past years the Multiple Services Contracts (“MSC”) legal scheme.

- In addition to the referred efforts, acknowledging its lack of capacity to be able to meet domestic demand, Mexico has been promoting the construction of LNG terminals, together with pipeline developments that will provide access to both the Atlantic Ocean and to the Pacific Ocean.

slide103

Natural Gas Market

- In order to be able to increase production levels, the government intends to invest in exploration of non-associated petroleum gas reserves at Burgos Basin, and other major potential areas at Lankahuasa basin, as well as to open exploration and exploitation of such natural resources by private investors.

- To such end on September 20, 2005, a bill to amend certain provisions of the Mexican Constitution, as well as to enact new laws was submitted to the Mexican Congressto open exploration and production of non-associated to petroleum gas reserves to private investors, as well as to allow private investment in the transportation of refined hydrocarbon products.

slide104

Natural Gas Market

- Likewise, Mexico is currently exploring the possibility of importing natural gas from non US sources, as well as having Pemex invest abroad in order to bypass the current constitutional restrictions.

slide105

Gardere, Arena y Robles, S.C. Torre Esmeralda IIBlvd. Manuel A. Camacho No. 36-1802Lomas de ChapultepecMexico City11000MEXICOTel: + (52)(55) 5284-8540Fax: + (52)(55) 5284-8569

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