Norberto GaonaWith the recent approval of major structural reforms proposed by the Enrique Peña Nieto administration, 2014 will go down as a landmark year in Mexico’s economic history.
“Nearly all the structural reforms proposed by the Legislative Branch have now been passed. Now what is needed is to establish the secondary legislation to regulate the way in which these reforms will be applied,” stated Jose Miguel Zozayacorrea-Kuri, Corporate Partner M&A at Baker & McKenzie.
Although the Telecommunications Reform was not approved exactly as submitted by the executive branch, a “revised version” was passed. “It is not as aggressive as planned: it takes special care of agents from the telecommunication sector – those involved in television and the cell phone and landline industries – so as not to put off big investors. Congress made amendments to it, but it is still a step in the right direction,” said Zozayacorrea-Kuri.
There are big hopes for the Energy Reform, whose secondary laws were approved by Mexico’s Congress late on August 6, as well as for the National Infrastructure Plan 2014-2018. This plan aims to improve society’s welfare levels, promoting development in all regions and sectors of the country.
“This year foreign investors are keeping a close eye on the country,” revealed Zozayacorrea-Kuri during an interview with Nearshore Americas. “2015 will likely see an increase in foreign investment, as a direct result of the approval of these secondary laws.”
Investments in Motion
According to the merger and acquisitions expert from Baker & McKenzie’s Guadalajara offices, there are significant state and federal initiatives in place that will affect investments in the state of Jalisco. In 2014, Jalisco was awarded a budget of over 83 billion pesos (US$6.3 billion), with an additional 30 billion pesos (US$2.3 billion) from the National Infrastructure Plan. Of that second, 17.6 billion pesos (US$1.3 billion) were set aside for the construction of the third line of Guadalajara’s Metro and the rest was assigned to infrastructural projects such as the bridges to be built in the Manzanillo Port and the highway to Puerto Vallarta.
Direct foreign investments in Jalisco, especially those coming from the United States, are not expected to increase significantly when compared to last year. According to Zozayacorrea-Kuri, this is because a lot of the investments are going to other areas in the Bajio district.
Far from being a disadvantage, Zozayacorrea-Kuri sees this as a great opportunity for Jalisco as the extra investments in the Bajio region will allow the state to export specialists from the automobile, aerospace and IT sectors. “Jalisco already has the qualified personnel to fill this need,” he said.
According to Zozayacorrea-Kuri, the Bajio corridor is rapidly becoming saturated: there is great demand for human resources, the industrial parks that have been built are not proving big enough and water supply could become a real problem. “Jalisco is building industrial parks close to the region so they can continue to support the corridor.”
Zozayacorrea-Kuri highlighted initiatives that are underway in other countries, such as Nicaragua, where, thanks to investments from China, they are planning to build a canal linking the Caribbean with the Pacific Ocean. “The advantage of the Nicaraguan Canal project is that it includes one of the largest lakes in the world and one of the deepest rivers. While China has a vested interest, Cemex have also made known their plans to get involved in the project.”
Zozayacorrea-Kuri added that a virtual canal is being “built” in Mexico. The Manzanillo Port, located in Colima state, is undergoing development, with the intention of making it one of the most high-tech ports in Latin America. It will be linked by rail to Cancun so that merchandise can be transported from one end of the country to the other, serving as a commercial bridge between the east and the west. According to Zozayacorrea-Kuri, “The National Infrastructure Plan is looking to invest in the railway which will efficiently connect Manzanillo with the Yucatan Peninsula.” Kansas City Southern also has “ambitious plans – to transport passengers as well as merchandise.”
A Sensitive Subject
The Energy Reform, and the matter of exploring, extracting and refining petroleum, has long been a sensitive issue in Mexico. It is often heard that “Mexico’s petroleum is for the Mexicans” but “no Mexican has ever received dividends from Petroleos Mexicanos (Pemex),” stated Zozayacorrea-Kuri. He also recognized that, while this state-owned company is one of the largest petroleum companies in the world, it is also reporting some of the biggest losses.
Plans are being made to build a third refinery, as part of the National Infrastructure Plan. It will be built under the advice of global companies. The Brazilian company PetroBras and the Norwegian company Statoil, among others, have shown interest in this project. “The sensitive issue of the role foreign investments should play in exploring, extracting and refining petroleum is yet to be addressed,” states Zozayacorrea-Kuri.
He added that it should be noted that the Mexican Petroleum Worker’s Syndicate no longer participates in the Pemex Administration Board. This is considered “a big step forward”.
What is on the horizon for the economic stability of the country? According to Zozayacorrea-Kuri, economic stability has been maintained for over a year and a half under President Peña Nieto’s administration. In fact, “macroeconomic indicators are equal to those of the (previous administrations). So, from a macroeconomic viewpoint, the country continues to be stable. What Mexico hasn’t been able to achieve, is to reduce poverty.”
Zozayacorrea-Kuri is of the opinion that there are two relevant issues: the constant improvement of public security and keeping the country’s trust. “The country’s trust is only gained with a lot of hard work, and it can be lost from one day to the next,” he said.
“The structural reforms have injected a needed dose of confidence into the country; and other countries, such as the United States, are finally taking notice of Mexico,” he concluded.
The reforms in Mexico, especially the Energy reform that completely changes the legal framework for oil&gas and electric utilities, is a really radical change, that will create giant opportunities in IT and BPO. For example, the national electric utility of Mexico (CFE) needs to be broken into four independent companies (generation, transmission etc),and then transform itself from a State monopoly (without any mandate to be efficient) into multiple enterprises that will be measure as private enterprises. The transformation of PEMEX (the state O&G monolopy) is no less dramatic. These structural changes have dramatic IT consequences, stating from the very basic such as accounting and cost systems, and going to the very complicated such as systems to support deep-sea and non-conventional well drilling and operations. The art of the reforms will be in the execution of the laws with transparency and efficiency.