Private investors argue Mexico’s proposed constitutional amendments will do away with judicial independence and erode the legal certainty they need to invest in the country. Eva Llorens examines the impact of the proposed constitutional changes on the infrastructure sector.

Following the recent passage of President Andrés Manuel López Obrador’s (AMLO) constitutional text changing the way judges are chosen in Mexico, two business groups said the initiative would halt private investment and violate the U.S.-Mexico-Canada Free Trade Agreement (USMCA).

AMLO’s proposed judicial reform would allow voters to elect the country’s federal, state and local judges. Investors said the judicial reform and another constitutional amendment pushed by AMLO that would repeal independent regulatory agencies, would do away with the legal certainty the private sector needs to invest in the country.

“Due to the current circumstances, we have decided against speaking about the enormous US investment (in the country) because we want to analyze the impact of the judicial reform,” the American Society of Mexico said through its president, Larry Rubin.

The initiatives are two of 18 proposed constitutional amendments the ruling Morena Party introduced in February 2024 after previous efforts by the outgoing President to pass them were either rejected by Congress or deemed unconstitutional by the courts. The recent June 2024 general elections gave the President’s Morena Party, the majority it needed in Congress and the Mexican states to pass the amendments. During a speech last week, AMLO said judicial reform was needed to purify the system from nepotism and corrupt judges.

Israel Hurtado, founder & CEO of the Mexican Hydrogen and Sustainable Mobility Association, which has more than 50 members, told Infralogic “the industry is very concerned. This and the proposed repeal of independent regulatory agencies eliminate transparency, fairness and competition.”

He said the industry is in a “wait and see” attitude at this juncture in the process.

Representatives for President Claudia Scheinbaum could not be reached for comment. Publicly, however, she has given her blessing to the amendments, shattering private sector hopes for a more congenial relationship with the government and a resumption of public-private partnership projects halted under AMLO. Scheinbaum is slated to inherit over 160 infrastructure projects left undone by the current administration, according to government officials.

“The problem here is that her team has failed to see the relationship between the reforms and legal certainty for projects. The public is supporting this, but they have no idea what is going on,” an executive at a company in Mexico told Infralogic on condition of anonymity.

The judicial branch constitutional amendments, which were the most controversial of all the amendments AMLO proposed, were approved last week in the House and are expected to obtain Senate approval today. Rubin is urging the Senate to consider his group’s objections. While the Mexican Congress will deal with the other constitutional amendments after Scheinbaum takes office on 1 October, individuals interviewed by Infralogic said they still expect them to move forward.

Constitutional amendments

Some of the 18 constitutional amendments will directly impact private investment in infrastructure.

One amendment calls for repealing seven autonomous or independent entities and regulatory bodies whose main job is ensuring fairness for specific sectors. These are the Federal Commission for Economic Competition (COFECE), the entity that ensures a free and fair business competition; the Federal Telecommunications Commission; the National Council for the Evaluation of Social Development (CONEVAL), which evaluates social policies; the Federal Institute for Access to Public Information and Data Protection, whose duties include guaranteeing government transparency; the National Hydrocarbons Commission (CNH); the Energy Regulatory Commission; and the National Commission for the Continuous Improvement of Education (MEJOREDU). Public agencies will absorb these independent regulatory bodies to save money for pension payments.

Another amendment impacting the infrastructure sector codifies that private energy projects will not take preference over the state’s public utility in the provision of energy. The amendment says that having electricity is a human right and not an economic commodity, and it requires the state to guarantee everyone access to power. Planning for the power sector should focus on ensuring electrical sovereignty. Under AMLO’s tenure, the private sector’s construction of new energy projects, which began with the 2013 energy reform, was halted in favor of state companies, like PEMEX, promoting energy supply security.

The amendment also notes that internet service is a critical strategic sector. Another amendment calls for using the country’s cargo railways for passenger trains.

Hurtado noted that restructuring the judicial branch and repealing the autonomous entities erodes the legal certainty guaranteeing that disputes with investors will be treated fairly because judges and regulators will be part of the governing administration and lose their independence.

Claus von Wobeser, president of the International Chamber of Commerce Mexico in Mexico, added that judicial reform and the repeal of autonomous entities violate the Free Trade Agreement (TLC) with the United States and Canada because they go against Mexico’s obligation to maintain independent entities and organizations free from political influences. He said the proposals are putting nearshoring activities at risk and will drive investment elsewhere.

Morena majority

Jaime Olaiz González, a constitutional and international law professor at Universidad Panamericana Law School, explained that the constitutional amendments must obtain the 2/3 of the vote in each chamber of Congress. The process then continues in the 32 states. The president needs 17 states to pass the amendments before signing them into law. The official government gazette must publish them to become effective.

Despite the complexity of the process, Olaiz González believes the amendments will become the law of the land because the Morena Party has “ample majority and the control of more than 17 states.”

He explained that the reforms, such as the judicial reform and the one repealing independent regulatory agencies will put Mexico “in a spiral of incompliance with TLC and that impacts the friendly atmosphere that should exist for investors.” The TLC requires Mexico to have independent entities that can resolve disputes.

Mexico’s amendment change, if approved, would shift the judiciary from an appointment system largely based on legal training, rigorous exams and qualifications to one in which candidates with a law degree and relatively little experience could run to be elected as a judge. “The reform calls for judges to be chosen by popular vote with no other requirement than having a law degree,” he said. “So, you can have a very popular judge who does not have the sophisticated knowledge or experience in cases dealing with the protection of investments, which are complex.”

While an investor can choose to resolve a dispute with the government or another investor through arbitration, he said those decisions must get the official approval of the courts.

The proposed repeal of the independent regulatory entities, which will be merged with public agencies, also creates a problem for private investors involved in disputes.

“If you are an investor who has a dispute about unfair competition by a state agency, you will have the anomaly of having a judge who is a sympathizer of the ruling party and the regulator working with the agency that owns the state agency competing with you. This dispute will be evaluated by a judge who is a sympathizer, and a regulator who is both a party in the case and a judge,” he said.

In the end, he believes the devaluation of the Mexican peso and a downgrade by credit rating agencies will be the only things that may put a stop to the amendments.