Thought leadership from our experts

Energy reform in Mexico

By the time the reader is reading this article, the so called impossible energy reform will have been approved by the Mexican congress.

This is a historical moment, since in most of the 20th century and what has passed of the 21st Century, the Mexican energy sector has been ruled by two government natural resources and energy entities (PEMEX and CFE) as well as public laws that did not allow major private participation.

Before this reform, both entities were the most important clients for the construction and infrastructure companies in the case of energy projects. Therefore the construction sector was used to having the Mexican State as a counterpart as well as a very conservative and traditional way of doing things.

With the new reforms, these government entities (PEMEX and CFE) will be "productive companies of the State" which means that they will be part of the government but with different characteristics, mainly having productivity as a target. The modification mainly looks after the oil, gas and electricity subsectors to be opened to the private sector, which means that there will be a truly competitive marketplace between public and private participants.

This will change the Mexican construction industry dramatically for several reasons:

(i) Goodbye to the Powerful public sector as the main client.

Mexico's construction sector existed thanks to a powerful public construction industry. This meant that most of the projects were planned and executed under the public works law, or any other administrative law/regulation. As a consequence of the energy reform, the nature and contractual /legal nature of energy projects will change dramatically since new projects will not be purely public, but more oriented to the private sector, since the different contracts will be mainly ruled by the Commerce Code and the Civil Code. Although this will be good in some ways (since many old regime vices will be eliminated), it is known that private clients are more sophisticated and exigent and the will of the parties, and their position in the market (more than the law) will drive operations.

(ii) New counterparts.

Mexico´s construction sector had a long life of dealing with public officials as counterparts on their contracts representing State owned companies. This meant in many occasions that projects had issues not only related to the project themselves, but matters such as responsibility of the public government officials, budget and planning regulations, political matters, etc. With these new modifications, the Construction sector will have to deal with different problems: More aggressive counterparts from international energy companies; multiple ways of contracting (according to the clients practices and needs), and also the possibility of applying model contracts used in the private sector such as FIDIC, AIA, CONSENSUSDOCS, etc. This will modify the negotiating of contracts, formation of contracts, administration of contracts and of course, new resolution methods as explained below.

(iii) The need for New Dispute Resolution Methods.

Mexico's construction sector had lived with very poor dispute resolution methods such as litigation and very conservative arbitration, but now, parties entering into a construction contract of a private plant, a private transmission line or alike, will have to find efficient ways to solve their disputes such as Dispute Boards, or mediation. These dispute resolution methods will have to be successful in order to avoid situations such as the very unfortunate arbitration cases in Mexico in the past years.

(iv) Compliance challenges

The energy sector is considered one of the sectors most affected by corruption. Therefore , the energy reform will bring challenges to the construction industry regarding compliance matters since companies from countries where aggressive compliance regulations are in force (such as the United States of America with FCPA, the United Kingdom with the UK Bribery Act and/ or Canada with the Canadian Bribery Act), will actively participate in the market. This means that the companies involved will have to be very careful about their operations in the market in order to avoid breaches of these laws, in addition to the existing anticorruption in public procurement laws applicable in Mexico.

(v) A new mindset

The traditional national construction sector will have to modify their way of thinking with the new regime, the new rules and the participation of the new players in the market. Among other things, the entry of companies from diverse parts of the world, including Asian corporations, will oblige the players to understand that the global infrastructure marketplace is highly sophisticated.

Of course, these are only some of the matters that the Mexican construction industry will have to face and achieve. In any case, we expect so many changes after the energy reform is implemented that the only way to describe things is to state "that things will never be the same as they used to be" so construction lawyers have to be prepared for all these challenges in order to be able to provide to their clients timely and effective response to their needs.