Contributed By Gonzalez Calvillo, S.C.
Mexico has been an attractive destination for project finance for over a decade, with infrastructure projects spanning several sectors. However, recent structural reforms have had an important boosting effect on the project finance sector, specifically with respect to energy, telecoms and infrastructure. This can be seen in the increasing activity in the construction and operation of infrastructure projects.
For an overview of the legal framework, please refer to the sections below.
Public-private transactions (“APP”) are widely used in Mexico's long-term investment projects and have the purpose of providing services to the public sector by developing infrastructure built and operated by the private sector.
APP transactions are regulated by both federal and local authorities (depending on the jurisdiction of the entity executing the relevant APP). At a federal level, main regulations are provided under the Ley de Asociaciones Público Privadas, and its regulations. On the other hand, local regulations may be set forth in different laws (which are in most cases consistent with federal regulations). This regulatory scheme seeks the development of infrastructure in Mexico by allowing joint ventures, partnerships and other forms of associations, between the public and the private sectors without major restrictions or obstacles.
While the financing component of project finance transactions does not require any sort of governmental approval, the investments themselves could require the authorisation of different government agencies depending on the scope of the transaction and the specific industry or sector the project falls into. On one hand, agencies like the Federal Antitrust Commission (Comisión Federal de Competencia Económica) or the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones) may need to approve the transaction from an antitrust standpoint. On the other, authorities like the Ministry of Energy (Secretaría de Energía), the Energy Regulatory Commission (Comisión Reguladora de Energía), the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos), the Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales), the National Water Commission (Comisión Nacional del Agua), the Ministry of Economy (Secretaría de Economía), the Communications and Transportation Ministry (Secretaría de Comunicaciones y Transportes), among others, may need to authorise the investment (through the granting of concessions, licences, and other permits).
Generally, project finance transactions are not per se subject to taxes, fees or charges. However, general tax obligations would apply.
Other than specific formalities to be followed depending on the specific project at hand, project finance transaction documents are subject to the jurisdiction considerations, fees, formalities and registrations outlined above (particularly Section 5), specifically with regards to the implementation of financing structures and related collateral.
The main governmental agency responsible for the energy sector (encompassing oil and gas) is the Ministry of Energy (Secretaría de Energía) which sets forth Mexico's public policy regarding energy resources. In this sector, there are also two agencies that play a significant role; these are the Energy Regulatory Commission (Comisión Reguladora de Energía), generally in charge of surveilling and promoting the efficient performance of the transportation, storage and distribution of oil and gas, refined products and petrochemicals, as well as power generation, supply and transmission activities; and the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos), responsible for, among other things, surveilling the exploration and extraction of hydrocarbons. Other agencies come into play in the energy sector and include the Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales), the National Water Commission (Comisión Nacional del Agua), etc.
As for the mining sector, the main authority in charge of surveilling, as well as granting the necessary authorisations, is the Ministry of Economy (Secretaría de Economía).
The primary laws and regulations range from federal to municipal statutes and will apply depending on the specific project or investment. That being said, the general framework applicable to project finance transactions in Mexico includes: the Federal Civil Code (Código Civil Federal), the Commerce Code (Código de Comercio), General Law of Business Organisations (Ley General de Sociedades Mercantiles), and the General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito). Specific statutes to keep in mind for the energy and mining industries are the Mining Law (Ley Minera), Hydrocarbons Law (Ley de Hidrocarburos), Power Industry Law (Ley de la Industria Eléctríca), Energy Transition Law (Ley de Transición Energética), Geothermal Energy Law (Ley de Energía Geotermica), National Waters Law (Ley de Aguas Nacionales), and the General Law on Ecological Equilibrium and Environmental Protection (Ley General de Equilibrio Ecológico y la Protección al Ambiente). Relevant secondary regulations would highly depend on the specific transaction.
The main issues that need to be considered when structuring a project finance deal arise from the terms and conditions under the project’s main agreements, and the nature of the project assets. These issues mainly have to do with the limitations that these may bring from a financing perspective (social and environmental impact, risks and collateralisation) and how to overcome them.
The most commonly used legal form for a project company is a corporation (known as sociedad anónima), which shields its shareholders from the liabilities of the project company. These companies are mainly regulated by the General Law of Business Organisations (Ley General de Sociedades Mercantiles) and the Securities Market Law (Ley del Mercado de Valores). However, limited liability companies (known as sociedades de responsabilidad limitada) are sometimes used as well – the foregoing mainly due to tax (pass-through) considerations.
Generally, foreigners can participate in Mexican projects without significant restrictions. That said, limitations apply to strategic activities, with foreign investment being restricted or not permitted at all. Such limitations are contained in the Foreign Investment Law (Ley de Inversión Extranjera) and basically entail the following: (a) certain activities are exclusively reserved for the state and include the control of the national energy grid and management of radioactive materials, among other things; (b) certain activities may only be carried out by Mexican entities (with a foreigner’s exclusion clause) and include, among other things, transportation of passengers via land, and development banking; (c) subject to certain investment amount thresholds, foreign investment is limited to activities like port management, firearm fabrication, fuel supply to aeroplanes and trains, and national air transportation; and (d) the National Foreign Investment Commission (Comisión Nacional de Inversión Extranjera) must authorise certain transactions where foreign investment represents more than 49% of the capital stock of the company carrying out the corresponding activity – these include, among others, construction and operation of railroad systems, education services, legal services, etc.
Likewise, Mexico is party to several international treaties that protect foreign investment by, among other things, providing alternative dispute resolution mechanisms, protection from expropriation, free transfer of funds, etc.
The typical source of project financings in Mexico is bank financing paired with export credit agency financing – this financing comes from both international banking institutions as well as from Mexican banks (commercial and development). That said, the use of project bonds and other structured securities is beginning to make noise and take a place in the Mexican project financing market (eg in CDMX's new airport). These have proved to be attractive investments for Mexican pension funds (AFORES), which have taken advantage of relevant tax benefits.
Notwithstanding the foregoing, financing these types of investments with equity is a useful alternative in some scenarios.
The typical structure for project financings involves a credit agreement, guarantees from third parties, letters of credit (guaranteeing the risk capital), promissory notes, customary conditions precedent, the EPC/CPS, the contracting of relevant insurance, financing models, and a guarantee, management and source of payment trust to which all the assets of the project are transferred (including collection rights and financing proceeds) to serve as the funding vehicle of the project (subject to work progress), its collateral, and the source of payment of the different financings.
Under Mexican law, title to natural resources belongs to the state. To that end, the exploitation of natural resources typically requires an authorisation from the relevant government agency in the form of a concession or permit. Generally, the latter is usually only granted to Mexican entities. Likewise, and depending on the specific resources, there are restrictions for private players to participate in activities across the spectrum (extraction, transportation, distribution, export, etc). In other words, certain activities related to the exploitation of natural resources are reserved exclusively for the state.
The payment of certain fees may also be required depending on the specific activity or natural resource being exploited. For example, private entities engaged in upstream activities are required to pay/receive a percentage (either in cash or in kind, depending on the specific contract) on the gross value/amount of the hydrocarbons produced.
There is a robust and vast body of laws regulating the environment as well as health and safety. On the environmental end, these laws seek to protect ecological balance, comprehensive waste management, biodiversity preservation and climate change. As per health and safety, the General Health Law (Ley General de Salud) sets forth the primary framework that, together with secondary regulations and official standards, seeks to guarantee worker's health and safety.