MEXICO: An Introduction to Projects
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I. 2020-2021: General Overview
The World Health Organization identified the first SARS COVID-19 cases on 31st December 2019, in the town of Wuhan, Hubei Province in China. Since then, the disease has managed to spread on a global scale, affecting countries around the world, and with it their economies. Mexico was no exception to this. On 23rd March 2020, Mexican authorities announced that due to the high rate of infection within its population, strict health and public measures were to be taken. Some of these measures included a series of complete lockdowns, which not only affected small business, but also some of the most influential sectors in the economy, including the construction industry, leading to the weakening of the Mexican economy as a whole.
Throughout the year of 2020 the Mexican economy plummeted, reaching a GDP drop as large as the one estimated during the Great Depression, dropping 8.3% from the previous year. During the third quarter of 2020 Mexico experienced a partial recovery in its economy only to be halted by the second wave of infections, resulting in additional lockdowns and suspension of multiple projects in the construction industry as well as the closing of several businesses.
Moreover, during the first few months of the following year, the industrial activity was severely affected as a result of two major events. The first event was the worldwide semiconductor dearth which resulted in the halting of operations of several auto plants. The second event were the gas shortages and power outages resulting from the cold weather changes in the United States of America which disrupted energy markets and affected the Mexican economy. As of the second quarter of 2021 it has been estimated by Trading Economics that Mexico’s economy has advanced 1.5%, following a 0.8% growth in the previous period. Likewise, the construction sector of the economy is estimated at a growth of 15.5%.
In this regard it is also important to note that by the end of 2020, Mexico improved its place along the ranked countries in the Direct Foreign Investment Rank, rising from its position in 14th place in 2019 to 9th place in this ranking.
II. Private and Public Construction
Although the second quarter of 2021 has shown significant growth in the construction industry according to Trading Economics, multiple construction projects have suffered suspensions and labour shortages, which have resulted in cost impacts as well as a disruption in supply chains, creating as a result a decrement in the construction industry.
Regardless, with a series of important health and social measures applied, the construction industry is gaining strength. Some of the measures that have been applied in the construction industry include the publishing of a decree by the Health Ministry, designating the construction, mining and manufacture of transportation equipment industries as essential activities, allowing these industries to resume their normal activities as of 1st June 2020.
However, it is important to note that the private projects are the ones sustaining the industry and aiding the Mexican economy. According to information from the association México Cómo Vamos, in the first half of 2021, 88% of the investments in Mexico belong to the private sector, out of which 47% come from private construction projects.
The private construction industry has begun developing sophisticated software programs with the use of drones and sophisticated algorithms, used to capture clear images of construction sites, aiding architects and engineers in providing clear and precise images of the project site, as well as precise measurements of the constructions without the need to attend the construction site as often. Although these technological advances are in the early stages of development, it is important to note that they are gaining momentum with each passing day, as these programs and this software may signify a relevant change in the construction industry in the future.
Pursuant to the public construction sector, it is important to note that the investment in public projects has not been significant.
According to the Mexican Chamber of Construction Industry only 2.2% of the GDP represents public investments in this sector of the economy. In this context the Mexican Chamber of Construction Industry (CMIC) has considered the need to generate alternative sources of infrastructure financing, responsibly taking advantage of various forms of public-private partnerships (PPP) with strict principles of transparency and state stewardship.
In this regard, the CMIC has presented a proposal before the National Conference of Governors (Conago) offering financial schemes to strengthen investment in infrastructure, in order to contribute to the reactivation of the Mexican economy. The CMIC has identified a total of 264 construction projects divided by state and sector. The CMIC is now proposing that through the Conago they be promoted in order to achieve their full execution, with the sole purpose of promoting infrastructure projects and reactivating the economy and employment, as well as to improve and increase productivity and competitiveness in the region.
III. New Legislation and its Impact
a) A New Electricity Law
As of January 2021, the head of the Executive Branch sent the Congress an initiative with a draft decree reforming and adding various provisions to the Electricity Industry Law (LIE), seeking to eliminate the wholesale electricity market by means of the implementation of a series of changes that would benefit the Federal Electricity Commission (Comisión Federal de Electricidad, CFE) to the alleged detriment of private producers. It should be noted that as a result of the publication of the reform on 9th March 2021, several amparo lawsuits (constitutional challenges) have been filed requesting the suspension of the effects, which have been granted for general effects. That is to say, in economic competition issues, the suspensions have been granted with general effects and with scope effects to the economic agents that participate in the electricity sector. This new reform has created growing unease for international investors as well as the Mexican legal sector, for which we recommend keeping a close eye on the results of these amparo lawsuits.
b) Modifications to the Federal Public Works Law
The second reform proposed this year (which is still pending approval by the Senate) was made pursuant to the Public Works and Related Services Law. On 8th April 2021 the Chamber of Deputies approved, generally and specifically, several amendments to some articles of the Public Works and Related Services Law. This reform focuses on three main topics including the following: (i) improvement of technical quality of project selection, execution and evaluation, (ii) improvement of qualification processes for persons in charge of executing public works and (iii) the state’s obligation to ensure better price and quality of conditions. It is important to highlight that this new reform has not yet been enforced.
The first objective of the reform is established as an obligation of the agencies and entities to have environmental permits, property rights, real estate and assets necessary to be able to carry out procedures related to bids, awards and contracting. Such bids will be carried out through the electronic platform CompraNet, which will be published in the Official Gazette of the Federation. The reform establishes that both individuals and legal entities interested in participating in the aforementioned contracting procedures shall be obliged to register in the Sole Contractors Registry of the corresponding agency or entity. The agencies and entities will have a comprehensive system that will classify contractors with respect to the following criteria: (i) specialty, (ii) experience, (iii) contract compliance and (iv) capacity for the execution of the works or services entrusted.
Regarding the second objective, which refers to the improvement of qualification processes for the people in charge of executing public works, the reform seeks to employ new qualification processes so that public works are executed by people who have the experience, capacity and compliance with the necessary requirements to satisfy the demand for world-class public works. This objective is focused on avoiding projects such as the Mexico-Toluca Train, a project that was initiated without the possession of the land on which it was built.
Regarding the third and last objective, reference is made to the state's obligation to ensure better price and quality of conditions. The state will have the obligation to ensure better conditions with respect to price, quality, financing and contracting opportunity, which will be carried out through public bids allowing the participation of small, medium and large companies.
c) New Labour and Outsourcing regulations
A third reform was also issued this year pursuant to the Subcontracting Law. On 23rd April 2021 a decree was published in the Official Gazette of the Federation amending, adding and repealing several provisions of the Federal Labour Law, the Social Security Law, the Law of the National Workers’ Housing Fund Institute, the Federal Tax Code, the Income Tax Law, the Value Added Tax Law, and the Federal Law of Workers in the Service of the State, in connection with labour subcontracting. This reform mainly focuses on the following aspects: (i) the subcontracting of personnel is prohibited when directly related to the social object of the company, (ii) the creation of the Registry for Special Services or Special Works Providers (iii) employment agencies or intermediaries that intervene in the personnel hiring processes will not be considered employers, and (iv) two new modalities were created for the calculation of profit sharing. It is important to highlight that the law has allowed the subcontracting of specialised services which are strictly not carried out by the contracting party pursuant to their corporate purposes. Although these guidelines are still not clear as to which services fall under the qualification of specialised services, the legal sector has advised its clients to review and, if applicable, to modify their corporate purposes, in order to make sure that they are in full compliance with the law.
IV. Difficulties Faced by Clients and their Solutions
The amendments made to the outsourcing reform have generated much unease among national and international companies alike, as many of these companies have been subcontracting labour for some time in order to carry out their contractual obligations. Some companies have been advised to amend their corporate purposes, revise their production processes, submit enquiries to the corresponding authorities, and review the convenience of restructuring the company through the incorporation of new entities, in order to be in full compliance with the law. In this regard it is important to state that strict interpretation of this new reform has given way to better understanding of what types of industries fall within its subcontracting obligations reach. It is to our understanding that the law is not applicable to construction industry workers because they fall within the specialised services section. Regardless, as this is not an actual fact, but mere interpretation, we have advised our clients to carry out the registration process and, depending on the case, to amend their corporate purposes to comply with this new law.
Since mid 2020, an initiative of the “General Law of Alternative Dispute Resolution” (the “ADR Law”) has circulated in Congress, but as of this date has not been formally enforced. This initiative aims to drive the contractors into a pacific culture in attempts to reach a scenario where most of the disputed issues are solved between the parties in conflict, avoiding litigations and arbitrations. It is known that litigation and arbitration generally delay projects, affecting infrastructure and project completion as well as delivery. In this regard, the ADR Law would aid the contracting parties in Mexico in changing the manner of conflict resolution, in an attempt to reach a friendly solution outside of court. In other words, this reform attempts to resolve lawsuits by means of other conflict resolution mechanisms, leaving the option of trial by court and arbitration as a last resort. However, it is of our understanding, that the beforementioned initiative has not yet been formally approved by Congress.
In this regard, it is important to mention that ADR mechanisms, such as dispute resolution boards, negotiations, amongst others, are mainly characterised for their flexibility, promptness and confidentiality of their resolutions. The International Association of Supreme Administrative Jurisdictions states that one of the main benefits of using these mechanisms is the avoidance of litigious confrontation, which not only reflects a cheaper solution, but also an important reduction of costs pertaining to the litigation process and the opportunity to level the amount of work overload of jurisdictional authorities, resulting in the deferral of judicial resolutions. It is also important to take into consideration that the ADR allows parties to resolve conflicts in a more friendly environment in which they are granted the freedom of managing their own settlement.
As a result of the pandemic, the justice system has been facing an increase in work overload, which has led to the deferral of conflict resolutions. The courts have come up with strict measures regarding the admittance of people into the courts in order to comply with pandemic measures applied by the state, forcing the justice system to commit to the development and support of the ADR. In this regard, it is important to note that not all areas allow the implementation of the ADR as there are some administrative matters that require an arbitrable solution, which in turn does not allow the implementation of ADR.
Although the implementation of the ADR in the justice system is still a work in progress, Mexico has adopted ADR clauses in its commercial treaties and trade agreements in the past, therefore the transition to the justice system is expected to take place shortly.
The COVID-19 pandemic has severely affected many countries’ economies, Mexico was not an exception. Regardless Mexico has been able to adapt to its new situation, creating new laws and coping mechanisms in order to strengthen our economy.
The construction industry has been seen to have halted and plateaued in its growth compared to recent years, nevertheless, with the implementation of new technologies and communication platforms the construction industry has allowed international clients and foreign investors to reach the legal sector with greater ease, promoting and strengthening the private construction industry. Likewise, the government has made several attempts at focusing its efforts in strengthening the Mexican economy through new laws and regulations as well as the pursuit of an increase in local projects, strengthening the public construction industry. For some the target is clear, for others it is blurry. Time will tell the reality of these decisions.
Martina Perez Blanco
Juan Pablo Sandoval