Mexico likely to pass restrictive legal changes to mining and state contract procedures

Two draft bills submitted by President Andrés Manuel López Obrador (AMLO)'s administration on March 28 imply negative impact on businesses' legal certainty. One proposes multiple administrative changes allegedly to strengthen the state and prevent corruption, and the second focuses on the mining sector. Both appear likely to be approved.

The administrative changes would increase overall contract risks, particularly for extractive sectors. AMLO's draft bill on administrative procedures has three stated aims: to revert administrative actions that have allegedly damaged the common good or no longer serve their original purposes; to prevent corruption; and to reorganize operations of the federal government apparatus to centralize decision making and policy implementation.

In the first element, the bill aims to expand government capacity to promote judicial cases to nullify the award of contracts, licenses and concessions that were allegedly granted through corrupt arrangements. The language of the bill signals that these measures would protect the environment, indigenous communities, and access by local populations to key resources like water. It also indicates that these provisions are likely to primarily target extractive sectors.

Since 2018, there have been multiple precedents of AMLO unilaterally cancelling contracts granted by previous administrations or pressuring firms into renegotiation over alleged, but unproven, corruption. Discretionary government use of the proposed new legal tools for political purposes would entail a significant increase in contract uncertainty, with such risk likely to extend beyond Mexico's current six-year presidential term.

International arbitration

The bill also signals the government's decreasing willingness to comply with international arbitration awards. According to the Mexican government, the amount disbursed by the state in reparation payments to private companies as a result of arbitration awards increased by 500% between 2011 and 2019. To counter this, the bill would cap the amount of reparation payments that the government could make following an adverse domestic judicial ruling or an international arbitration award, although it does not specify how such limits would be calculated.

The energy sector — especially power — appears most likely to be affected by this measure if approved, given the multiple arbitration procedures that the state-owned Federal Electricity Commission (Comisión Federal de Electricidad: CFE) faces, many of which are a legacy from previous administrations. In the latest case, the CFE was mandated to make a US$85 million reparation payment to a Canadian private firm, which it completed in December 2022.

Proposed mining law changes would impose more restrictive conditions for investors, including expanding the list of reasons for project cancellation. The most relevant provisions included in the mining draft bill are a reduction in concessions' duration from 50 to 15 years, with the possibility of a single renewal for another 15 years; making obtaining a water concession for industrial use a pre-condition to obtain a mining concession; basing the award of concessions on public tenders; and obliging companies to pay at least 10% of a mine's revenue to indigenous communities if present in the concession area.

In addition, the bill would more than double the list of grounds under which the state would be entitled to cancel mining concessions. So far, the Mexican Mining Chamber (Cámara Minera de México: CAMIMEX) has stated that it expects Congress to involve stakeholders from the private sector in reviewing and fine-tuning the bill, although it has warned of "severe repercussions" to the industry if approved in its current form

Potential for Senate delay

S&P Global Market Intelligence assesses that passage of this legislation would significantly increase the risk of Canada or the US, the two largest investors in the sector, requesting formal rounds of consultations under the US-Mexico-Canada Agreement (USMCA). Neither the US nor the Canadian government has issued formal statements on the mining bill at the time of publication.

Passage of both bills is highly likely in the Lower Chamber, but the Senate is likely to delay approval given disagreements within the majority. Passage of these bills only require absolute majorities, which AMLO's National Regeneration Movement (Movimiento Regeneración Nacional: MORENA) party has in both chambers. However, MORENA's Senate majority shows less cohesion, with MORENA unity dependent on majority leader Ricardo Monreal's willingness to support the government-sponsored bills.

So far, Monreal has not expressed his position. Based on precedents set by other potentially controversial legislation, Monreal is likely to push for lengthy debate with stakeholders, deferring the approval process for at least three months and increasing the likelihood of adjustments or ad hoc case-specific arrangements

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.