Brighton Homes LTD

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Competitiveness in the Mexican Market
US / EUROPEAN NETWORK November 21, 2005
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Overview
Roberto Arena
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Overview

• General Information on Mexico
• Population 103.8 Million people
• GDP 676.5 Billion USD
• GDP Growth 4.4
• Exports of Goods and Services (GDP) 30.1
• Imports of Goods and Services (GDP) 32.2
• Foreign Direct Investment 10.8 Billion USD
• Source World Bank
• All data is referred to 2004, except for foreign
  direct investment, which is referred to 2003.

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Overview

• Main competitors in the international arena
• Brazil
• China
• India

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Overview
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Overview
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Overview
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Overview
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Overview
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Overview
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Overview

• Some actions taken
• 11 Free Trade Agreements (40 Countries)
• 19 Double Taxation Treaties in force
• 18 Double Taxation Treaties in formalization
  processes or under negotiation

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Overview

• Some actions taken
• 18 Investment Protection and Promotion Agreements
• 3 Investment Protection and Promotion Agreements
  under negotiation
• Undertaking substantial deregulation processes

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Overview
Growth Competitiveness Index Country 2004 2005
Variation (2004-2005) Finland 1 1
--- United States 2 2 --- Sweden
3 3 --- China 46 49
-3 India 55 50 5 Mexico 48
55 -7 Brazil 57 65
-8 Source World Economic Forum
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Overview

• Hot Legal Topics
• Hospitality Industry
• Labor
• Fiscal
• Competition Law
• Piracy / Contraband
• Limitation of liability under procurement
  contracts
• Natural Gas Market

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Hospitality Industry
Alejandro Ortiz
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Hospitality Industry

• Agenda
• Quick Snapshot of Hospitality Leisure Industry
  in Mexico
• Legal Framework
• FONATURs Role

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Hospitality Industry

• Quick Snapshot of Hospitality Leisure Industry
  in Mexico

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Hospitality Industry

• According to SECTUR, Mexicos tourism promotion
  agency, there were 20.6 million international
  tourism arrivals in 2004.
• Mexico occupies the eighth place on the World
  Tourism Organizations list of most visited
  tourist destinations in the world.

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Hospitality Industry

• With over 376,450 hotel rooms, the World Travel
  Tourism Council reports that the travel and
  tourism industry generated approximately 73.3
  billion USD of economic activity in 2004.
• This demand is expected to grow by 7.1 per
  annum, in real terms, between 2005 and 2014.

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Hospitality Industry

• The industry is expected to contribute 2.7 to
  the Gross Domestic Product in 2005.
• In 2004, employment in the broader tourism sector
  was estimated to encompass 2,865,700 jobs,
  representing 10.0 of total employment.
• Capital investment in the sector was estimated at
  14.7 billion USD or 10.8 of total investment in
  2004. By 2014, this should reach 43.2 billion
  USD, or 11.1 of total investment.

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Hospitality Industry
Number of Hotel Rooms Gran Turismo, Five-and
Four-Star Hotels Selected Cities in Mexico, 1995
compared to 2004
2004
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Hospitality Industry
Occupancy Average Daily Rates Selected Cities
in Mexico 2004
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Hospitality Industry
Legal Framework
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Hospitality Industry

• Restricted zones 100 kilometers from the
  Mexican border and 50 kilometers from the
  coastline
• Beach concessions
• The figure of trust for real estate projects
• Role of Notario Público

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Hospitality Industry

• Registry System
• Ejidos
• Environmental issues
• Lease vs management agreements
• Title Insurance

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Hospitality Industry

• Gambling
• Recent court decisions having an impact on the
  hotel industry
• a) Calculation of mandatory profit-sharing
• b) Discretional faculties of SEMARNAT
• Environmental risks
• Temporal or permanent suspensions
• c) Labor liability derived from outsourcing

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Hospitality Industry
FONATURs ROLE Institution that promotes
tourism projects through consulting services,
financing programs, and sale of real estate
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Hospitality Industry

• Mexico has one of the most stable, open and
  deregulated developing economies in the world,
  and it currently has the highest proven level of
  foreign reserves, totaling 51 billion dollars.
  The worlds three leading credit rating agencies
  have given Mexico investment grade status,
  upgrading the nations sovereign debt to
  long-term foreign currency debt guaranteed by the
  state.
• FONATUR has developed five Integrally Planned
  Resorts (IPRs) Cancun, Los Cabos, Ixtapa, Loreto
  and the Bays of Huatulco, seaside resorts that
  today enjoy worldwide recognition and competitive
  advantages over other national and international
  tourist destinations, such as having a Master
  Plan, urban-resort planning mechanisms, an Annual
  Construction Program operated by FONATUR and an
  Annual Maintenance Program operated by its
  affiliate, Baja Maintenance and Operation (Baja
  Mantenimiento y Operación, BMO).

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Hospitality Industry

• Serving as a determining factor in the growth of
  the tourism sector and its future outlook,
  FONATUR has over a period of 30 years developed
  tourist destinations that have contributed
  significantly to boosting overnight tourism to
  Mexico six-fold.
• The five destinations developed by FONATUR
  together offer more than 245 hotels and more than
  36,800 rooms, with occupancy rates that reached
  61.7 in 2002, or 7 percentage points above the
  countrys other beach resorts.

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Hospitality Industry

• These five destinations are examples of
  developments that spark regional growth. In
  2002, the states of Quintana Roo and Baja
  California Sur, where Cancun and Los Cabos are
  located, ranked in 4th and 8th place respectively
  in per capita GDP.

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Labor
Eduardo Pizarro-Suarez
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Labor

• Static and Social elements that characterize
  Latin American Labor Laws.
• Basic Principles under Mexican Labor Law
• - Minimum Benefits
• - Burden of Proof
• - Interpretation of Law

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Labor

• Minimum Benefits under Mexican Law
• Mandatory profit sharing
• Social Security
• Minimum Wage
• Overtime
• Vacation and Vacation Premium
• Christmas Bonus
• Termination Rights

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Labor

• Recommended Hiring Practices in Mexico
• Screening of Candidates
• White Unions
• Trial Period and Temporary Employment
• Independent Contractors

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Labor

• The Written Rule
• Internal Employment Regulations
• Employment of Foreigners
• Service Company
• Resignation Scheme
• Confidentiality and Intellectual Property

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Labor

• Proposed Amendments to the Mexican Labor Law
• Hiring Flexibility
• Burden of Proof
• Termination Provisions
• Unions

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Fiscal
Jorge San Martin Fernando Camarena
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Fiscal

• Along with other changes to legal frameworks,
  Mexico needs structural tax reforms to trigger
  its economic development.

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Fiscal

• SCOPE OF THE REFORMS
• Broadening the tax base
• Tax culture (fiscal discipline)
• Legal framework

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Fiscal

• BROADENING THE TAX BASE
• Informal business activities
• Mexicos tax system full of complications

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Fiscal

• TAX CULTURE
• Trust in the government (expenses)
• Red-tape
• No real incentives

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Fiscal

• LEGAL FRAMEWORK
• General description of the system
• Lack of efficiency

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Fiscal

• INCOME TAX
• Mexican vs International rates
• System full of exceptions

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Fiscal
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Fiscal

• VALUE ADDED TAX
• Mexican vs International rates
• System full of exemptions

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Fiscal
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Fiscal

• PROPOSAL
• Income Tax
• Rates reduction
• Elimination of exemptions

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Fiscal

• VALUE ADDED TAX
• Increase of rates
• Elimination of exemptions
•  

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Fiscal

• INNOVATIVE STRUCTURES
• Pass through entities
• Holding companies

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Competition Law
Marco A. Najera
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Competition Law

• Mexico has a Federal competition law system.
• Mexican Constitution (Art. 28)
• Mexican Government activities are not
  monopolies
• oil, hydrocarbons and basic oil derivatives
  (Pemex)
• electricity, nuclear energy, railroads, postal
  service and telegraphs.
• International Conventions (NAFTA, FTA with EU,
  etc)

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Competition Law

• Federal Law of Economic Competition (FLEC)
•  
• Enacted in 1993, after commitments assumed by
  Mexico under NAFTA.
• Created the Federal Commission of Competition
  (FCC).
• Brief and rather vague law requiring constant
  interpretation.
• FLEC Regulates
• Monopolistic Practices
• b) Concentrations

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Competition Law

• Secondary Provisions
• Regulations to the FLEC
• Internal Regulations to the FCC
• Criteria issued by the FCCs Commissioners
  (scarce)

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Competition Law

• Monopolistic Practices Investigations
•  
• Prosecuted through investigations carried out by
  the FCC, initiated by third party claims or by
  the FCC itself.
• The procedure is conducted by the FCC, calling
  competitors and affected players to provide
  information on the case.
• Procedure carried out in writing in the
  Commission (no interrogations).
• No leniency.

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Competition Law

• No field investigations are allowed.
• From six months to one year to be resolved.
• Fines and criminal sanctions could be imposed,
  plus orders to suppress the practice.
• Absolute Monopolistic Practices
• Horizontal - among competitors (e.g., cartels).
• No dominance is required.
• Fines up to 1,500,000 USD.

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Competition Law

• Relative Monopolistic Practices
• Vertical by economic agents not competing
  (i.e., suppliers, distributors, agents, etc.).
•  
• Dominance in the relevant market is required.
• - Fines up to 900,000 USD.

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Competition Law

• Control of Concentrations
•  
• Thresholds to notify
• Combined thresholds value of transaction,
  assets, turnover and shares of players involved.
• To regard only Mexican figures of the transaction
  and parties (as conglomerates).
• Value of transaction
• - Exceeding 50,000,000 USD.

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Competition Law

• b) Size of transferor value acquired
• If assets or turnover of target exceeds 50,000,00
  USD and more than 35 of targets stock or assets
  are acquired.
• c) Size of transferer and acquirer value
  acquired
• Assets or turnover of both parties exceeding
  201,000,000 USD.
• Assets accumulated by purchaser exceeding
  20,000,000 USD.

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Competition Law

• Notification process
• - Purchaser shall notify prior to the
  implementation in Mexico.
• Notification involves a large amount of
  information.
• After dossier is fully integrated, FCC resolves
  in 45 days 60 days in complicated cases.

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Competition Law

• - If FCC does not resolve in deadline, the
  concentration is cleared.
• The parties may decide to close and implement the
  transaction prior to obtaining the decision, if
  no harm to market exists.
• - Decisions, excluding confidential information,
  are published by the FCC in website and gazette .

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Competition Law

• - FCC may impose conditions to approve a
  transaction which can be proposed by the parties.
• - FCC may block a transaction and order the
  divestiture of the assets concentrated, control
  elimination and suppression of the operation (in
  Mexico).
• Fine not exceeding 1,000,000 USD for incurring in
  anti-competitive concentrations.
• - Fine not exceeding 450,000 USD for failing to
  notify prior to the transaction.

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Competition Law

• Challenge Procedures.
• Appeal within the FCC.
• Amparo (constitutional review) lawsuit.
• No ordinary court procedure available

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Competition Law

• Proposed Amendments to the FLEC.
• Improve description of anticompetitive practices
• Current law grants FCC discretional rights to
  interpret cases of anticompetitive practices,
  which has caused various constitutional and
  illegality claims.
• Leniency programs in cartel cases.
• FCC able to practice inspections and field
  investigations.
• FCC able to suspend the anticompetitive practice
  during the investigation stage.

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Competition Law

• Economic agents able to retract from incurring in
  an anticompetitive pratice and reduce sanction
• Modify thresholds to notify a concentration
• Simplify process to review concentrations not
  affecting competition
• Reduce deadlines to resolve
• Reduce information required to file a
  notification

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Competition Law

• Sanctions are increased to some extent
• Reduce legal timeframe in appeals
• Representation offices of FCC out of Mexico
  City.
• FCCs binding opinions
• New laws and regulations
• Public bid processes

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Competition Law

• Pending Issues
• Effective sanctions, including amendments on
  criminal felony provisions
• Create court procedure dealing with legality
• Specialization of judges and criminal
  prosecutors in competition matters
• Increase staff and budget of the Commission

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Piracy / Contraband
Andres Alvarez
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Piracy / Contraband

• Differences
• Piracy Infringement IP Statutes
• - Enforcement Mexican IP Institute
• Contraband Breach of Customs Statutes
• - Enforcement Customs Tax authorities

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Piracy / Contraband

• Similarities
• Outstanding losses for companies
• SW industry lost 407 million USD in Mexico in
  2004.
• Records, movies, apparel, wine spirits, HW,
  books

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Piracy / Contraband

• Existing legal framework containing criminal
  sanctions and administrative fines
• Contraband-- 3 months to 9 years
• Piracy-- 2 to 6 years

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Piracy / Contraband

• Enforcement
• Investigations
• Police Operations (Operative Costs)
• Legal work

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Piracy / Contraband

• Lack of results (3-5 years to obtain a favorable
  infringement resolution, usually corresponding to
  low administrative fines)

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Piracy / Contraband

• Government Actions
• Special Congress Commission
• Created in 2004 (no record of their actions, if
  any)
• Increase security
• Special investigations
• Far from desired results

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Piracy / Contraband

• Companies Actions
• Joint investigations (lower costs)
• Education
• Mass Media

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Piracy / Contraband

• Some thoughts
• Efficient enforcement (Sanctions for authorities)
• Customs authorities to enforce IP related
  statutes
• Specialized Courts
• Expedite court resolutions
• Increase sanctions
• Coordination (Private Government)
• Joint Campaigns (Education Incentives)

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Procurement Contracts
Andres Alvarez
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Procurement Contracts

• Standard practice of Mexican government entities
  
• No cap on liabilities derived from procurement
  contracts
• Some companies discouraged from participating in
  RFPs.

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Procurement Contracts

• Legal framework
• Constitution
• Public Acquisitions, Leases and Services Law
• Law on Public Works and Services related thereto
• Federal Civil Code

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Procurement Contracts

• Procurement statutes only provide the suppliers
  obligation to guarantee its performance under the
  corresponding agreement.
• No clear provisions on the extent of such
  guarantee.
• Reference to calling entitys procurement
  guidelines (Políticas, Bases y Lineamientos)

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Procurement Contracts

• Reference to the calling entitys acquisitions
  committee
• To the extent the calling entitys procurement
  guidelines and acquisitions committee are silent,
  the Federal Civil Code becomes applicable
• Federal Civil Code provides that contractual
  liability may be capped by entering into a
  contractual penalty clause

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Procurement Contracts

• A contractual penalty clause needs to be mutually
  agreed by the parties to the corresponding
  contract
• Hence, liability under procurement contracts may
  be capped only to the extent the Federal Civil
  Code becomes applicable, and the corresponding
  calling entitys officer agrees to such cap

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Procurement Contracts

• Catch
• Government entities officers are subject to a
  special liability regime provided in the Mexican
  Constitution and in the Federal Law of
  Administrative Responsibilities of Government
  Employees.

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Procurement Contracts

• Under the special regime, any act or omission of
  a Government officer that results in damage to
  the Mexican States finances (i.e., not being
  able to recover lost profits due to a cap on the
  liability of a procurement contract), may result
  in administrative fines equal to the
  corresponding lost profits, and even imprisonment.

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Procurement Contracts

• Mexican procurement statutes are deemed as
  public order statutes
• Any waiver to agreed on provisions of public
  order statutes are deemed null and void
• A cap on a procurement contract may be construed
  as a waiver of a public order statute, since
  government officers are bound to look after
  government interests

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Procurement Contracts

• Such obligation would imply the right to collect
  all damages arisen under a procurement contract.
• A cap to such liability would prevent the calling
  entity to collect all damages arisen under a
  procurement contract

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Procurement Contracts

• Conclusion
• Although arguably possible, the agreement on a
  cap of liability under a procurement contract may
  be construed as a waiver to a public order
  statute hence, deemed null and void.

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Procurement Contracts

• Possible action
• Amend the regulations to the procurement statutes
  in order to provide general guidelines that may
  be followed by calling entities in order to cap
  liabilities under the corresponding procurement
  contracts

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Natural Gas Market
Daniel Aranda
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Natural Gas Market
  Overview - According to official
information contained in the 2004-2013 natural
gas prospective issued by the Mexican Ministry of
Energy, during 2003, while the Mexican economy
experienced growth of 1.3, the natural gas
consumption grew at a rate of 8.6 compared to
the consumption rate of 2002. - Since 2003,
Mexico stopped exporting and began importing
natural gas
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Natural Gas Market
- Even though Japan is the worlds largest
importer of natural gas, it is estimated that
Mexicos spread between its domestic production
and the domestic demand will continue to increase
continuously unless drastic investment is made to
develop and exploit proved and probable
reserves. - It is also foreseen that in the
next ten years the domestic demand for natural
gas will experience growth at an annual rate of
5.8, thus, passing from 5.2 Bcfpd to 9.3 Bcfpd
in 2013.
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Natural Gas Market
- Likewise, the decline in wells productivity,
along with the high technical cost involved in
certain regions versus the low productivity of
same (Chicontepec), encourages Pemex to intensify
the exploratory perforation and development of
Burgos Basin and to increase inland and off-shore
production in Veracruz. Thus, to set the limits
of Lankahuasa field, as well as to build the
necessary infrastructure to transport gas from
that region to the Natural-Gas-Pipeline National
Grid (Red Nacional de Gaseoductos) has become a
priority.
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Natural Gas Market
- To date, Pemex has already awarded 8 MSC
with an estimated investment of 6.3 billion USD
with an estimate production of 700 to 800 MCfd by
2008 which would be focused on the Burgos basin.
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Natural Gas Market
- Mexico maintains a growing trend on the use of
dry natural gas, which has resulted in converting
Mexico in the tenth consumer of such natural
resource. To date, Mexicos natural gas reserves
are distributed among 10 basins (e.g. Burgos,
Salinas/Parras, Tampico-Misantla, Chicontepec,
Lankahuasa, Salinas, Chapayal, Macuspana
Campeche, and Offshore facilities) estimated as
follows
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Natural Gas Market
- Currently the growth of natural gas demand has
and is expected to continue to come from the
power sector because such plants are using
combined-cycle technology. - To date, Pemex Gas
has 10 gas processor complexes, 8 of which are
located in the south-southeast region and the
other two are in the northeast region.
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Natural Gas Market
- To date, CRE has authorized 5 LNG terminals
and expects to receive 2 more applications during
2005. - Mexicos transportation infrastructure
is composed of the Natural-Gas-Pipelines National
Grid and the Naco-Hermosillo system, both
property of Pemex, with an extension of 9,043 km.
- According to Pemex information, its pipelines
are currently saturated. Thus, Pemex has had to
use other, more expensive alternatives in order
to provide natural gas to its customers.
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Natural Gas Market
Legal Framework - Article 27 of the Mexican
Federal Constitution (the Constitution), under
its sixth paragraph, clearly sets forth that the
Nation has direct ownership over the oil and all
solid, liquid and gaseous hydrogen carbides
(jointly Hydrocarbons), expressly prohibiting
the granting of concessions for their
exploitation by private investors. - Derived
from the referred provisions, the Mexican
Congress and the executive branch enacted the
Regulatory Law of Article 27 of the Constitution
in Oil Matters (Ley Reglamentaria del Articulo 27
Constitutional en Material del Petróleo) (the
Oil Law) and its Regulations, respectively,
which constitute the principal laws for
Hydrocarbons.
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Natural Gas Market
- The Oil Law clearly sets forth that the
exploration, exploitation, production and first
hand sales of natural gas are reserved to the
Mexican government through the State-owned
company Petróleos Mexicanos (Pemex) and its
Subsidiaries. However, the Oil Law also provides
that private investors can participate within the
activities related to natural gas that the
corresponding Regulations authorize. - To such
end, the Executive Branch issued the Natural Gas
Regulations (The NGR), which provides the
general legal framework for the activities that
could be performed by private investors once they
are duly authorized by the Energy Regulatory
Commission (Comisión Reguladora de Energía)
(CRE). Activities include natural gas storage,
transportation and distribution.
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Natural Gas Market
- Furthermore, the NGR set forth that the CRE
may issue mandatory directives that would
regulate safety, construction and prices
standards that should be followed by all the
individuals holding a permission to perform any
of the referred activities. - CRE permits are
granted for a period of thirty (30) years and are
renewable. - It should be noted that the
exportation and importation of natural gas does
not require prior permission from the CRE, but is
subject to the applicable provisions of the
Customs Law and Trade Law. Thus, permit-holders
are only bound to provide statistical information
to the CRE in regards to their trade activities.
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Natural Gas Market
Regulation of Prices - Natural gas prices are
regulated in the Mexican market by the CRE. -
In principle, such governmental body, based on
international standards assesses which would be a
competitive price for first hand sales of LNG by
making reference to the Houston Ship Channel in
three particular regions of Mexico.
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Natural Gas Market
- Last September President Fox decreed a cap
on natural gas prices, temporarily suspending the
regulated price mechanism. The preceding was due
to the fact that since the unfortunate natural
disaster of Katrina the prices went up 35,
passing from 7.25 USD to 9.88 USD.
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Natural Gas Market
Challenges Possible Solutions - Pemex is
funded through the Federations Expenditure
Budget (Presupuesto de Egresos de la Federación)
which is a statute that is enacted on an annual
basis by the Mexican Congress and that clearly
obeys political interests. Thus, it is subject to
yearly restrictions and limitations. - Due to
the current financial situation of Pemex (its
equity balance, liabilities vs assets, and its
tax regime), along with the yearly budgetary
restrictions of the companys legal framework,
the company is unable to perform the necessary
investments, or liaisons that are needed to
expand its domestic gas production, strengthen
its pipeline infrastructure, or to increase the
number and capacity of its pipeline
interconnectivity with the border and with LNG
terminals.
102
Natural Gas Market
- Notwithstanding the preceding, Pemex in an
effort to increase such exploration and
production capacity developed in the past years
the Multiple Services Contracts (MSC) legal
scheme. - In addition to the referred efforts,
acknowledging its lack of capacity to be able to
meet domestic demand, Mexico has been promoting
the construction of LNG terminals, together with
pipeline developments that will provide access to
both the Atlantic Ocean and to the Pacific Ocean.
103
Natural Gas Market
- In order to be able to increase production
levels, the government intends to invest in
exploration of non-associated petroleum gas
reserves at Burgos Basin, and other major
potential areas at Lankahuasa basin, as well as
to open exploration and exploitation of such
natural resources by private investors. - To
such end on September 20, 2005, a bill to amend
certain provisions of the Mexican Constitution,
as well as to enact new laws was submitted to the
Mexican Congress to open exploration and
production of non-associated to petroleum gas
reserves to private investors, as well as to
allow private investment in the transportation of
refined hydrocarbon products.
104
Natural Gas Market
- Likewise, Mexico is currently exploring the
possibility of importing natural gas from non US
sources, as well as having Pemex invest abroad in
order to bypass the current constitutional
restrictions.
105
Gardere, Arena y Robles, S.C. Torre Esmeralda
IIBlvd. Manuel A. Camacho No. 36-1802Lomas de
ChapultepecMexico City 11000 MEXICOTel
(52)(55) 5284-8540Fax [phone]