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Mexico legal certainty

17 July 2019

On Wednesday (10 July), community organization Frente Unido Todos Somos Cacalotepec said it would ask Mexican President Andrés Manuel López Obrador (AMLO) for the cancellation of the Gasoducto Morelos pipeline project following his 8 July promise to resolve ongoing disputes about the pipeline's environmental impact. The project is part of the USD1.6-billion state-led Morelos Integral Project across three states, for which at least eight other communities have successfully had gas pipeline construction suspended via domestic courts.

In addition, on 1 July state electricity utility Comisión Federal de Electricidad (CFE) launched the renegotiation of seven other gas pipeline contracts with energy firms TC Energy, IEnova, Grupo Carso, and Fermaca, which have all faced delays. The renegotiation is due to claims by AMLO and CFE head Manuel Bartlett that clauses requiring state payments to developers that shut down operations under force majeure circumstances are 'unfair' and abusive. The CFE has also initiated an arbitration process against these four companies for the annulment of the clauses.

Significance

The ongoing gas-pipeline-related disputes highlight the high risk of contract renegotiation and cancellation for projects that encounter community opposition. This forms part of a broader deterioration in legal certainty for investors under AMLO's government, following high-profile project cancellations such as the USD13-billion Mexico City airport via referendum and the Los Cardones mining project, and more recently the provisions in the proposed Federal Austerity Law for the annulment of state contracts with alleged links to corruption.

Projects run by state-owned companies are likely to enjoy stronger presidential support and lower contract revision risks than private-sector-led projects; for example, AMLO is actively seeking the resolution of the CFE-led Morelos gas pipeline disputes at the same time as the annulment of CFE's financial responsibility in the other seven contracts under negotiation. A continuation of the shift away from competitive bidding towards direct contract awarding, experienced mainly in the energy sector, but also affecting construction, food suppliers, and pharmaceuticals, will indicate increased opportunities for executive discretion, corruption, and inconsistency in the awarding of future contracts.

Posted 17 July 2019 by Johanna Marris, Country Risk Research Analyst, IHS Markit

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