Is the Principio de Legalidad a Malleable Commodity for FDIs in Mexico? A TWAIL Critique

Gerardo Centeno García

Mexico’s 2013 Reforma Energetica (Energy Reform, RE) was a constitutional reform that allowed the participation of private companies (national or foreign) in the Mexican Energy Sector (MES), previously reserved solely for State-owned enterprises (SOEs). This constitutional reform modified articles 25, 27, and 28 of the Mexican Constitution (CPEUM), entering into force on December 20, 2013. To help the implementation of the reform’s content, the Mexican Congress created nine new laws and modified 12 existing laws, alongside 25 other bylaws. Former President Enrique Peña Nieto (EPN) talked about the initiative as an opportunity of development:

‘[T]oday, the energy sector faces new challenges. (…) By 2020 Mexico could become a structurally deficient country in energy. This scenario is serious because it would limit economic growth and, with it, the possibility of improving the quality of life of millions of Mexican families. (…) [H]ydrocarbons and energy (…) to accelerate the growth of the country.’

To allow private parties in the MES, the RE returned the text of the CPEUM to the state it was after the Petroleum Expropriation (PE) in 1938. Before the RE, only SOEs could participate in the MES, and the 1983 CPEUM exempted them from being deemed as monopolies (per Article 28 CPEUM, monopolies are prohibited in Mexico).

The PE and the national ownership of energy resources (born during the PE) are part of Mexicans’ cosmogony, reason why the RE was heavily criticised during its discussion in the Congress. Marquez notes that the reform distorted Cardenismo as a rhetorical discourse to defend the shift towards neoliberalism. The presidential administration ensured citizens that the reform would foster job creation, reduce electricity, and gas costs, SOEs would not be privatised, and using shared utility contracts, Mexico would retain the ownership of its natural resources while collaborating with PPs for their extraction. None of these promises have been fulfilled.

In 2020, Mexican President Andres Manuel Lopez Obrador (AMLO) sent a bill to reverse the RE, leading investment companies to adduce antitrust breaches and to present plaints against it in consequence. However, the current constitutional text is heavily charged with neoliberal legality principles, which allows the private parties to establish constitutional challenges against AMLO’s reforms. Moreover, as it is stated in the draft of the Electric Industry Law’s (EIL) statement of reasons, the new reform has a political motivation behind it, rather than combating the flaws within the RE’s MES. 

This article analyses how malleable is the Principio de Legalidad (Legality Principle) in terms of obtaining a Westernised vision of development, assessing how the legality settled by the reform favoured foreign direct investments (FDIs) during the years that the RE was applicable. Under the framework proposed by the ‘Third World Approaches to International Law’ (TWAIL) scholarship and ‘neoliberal legality’, the author studies the reigning legalism within the FDIs in Mexico’s electricity industry, which precluded omitted opportunities for corruption within the deals. By retaking the arguments included in the statement of reasons for the initiative of the RE and the Congress debates, this piece aims at identifying the passages that justified the liberation of the MES through promises of development, social welfare, and economic growth, easing legal requirements for FDIs while negotiating with the Mexican government. Moreover, it explains why the President’s anti-corruption discourse is not enough to palliate corruption but rather a simple combat myth that, although politically effective, lacks real legal impact combating it.

TWAIL

The MES’ distorted Principio de Legalidad can be combated through the legal scholarship known as Third World Approaches to International Law (TWAIL). The TWAIL paradigm suggests that the illegitimacy of the international law regime, arguing that it ‘reproduces and sustains the plunder and subordination of the Third World by the West’. The idea moulds perfectly into the significant string that the RE failed to bring the development it promised, which Kemmerer and Khan term a common hope for nations, being inserted into the ‘universal community’ through international law, the codex of ‘universally authorised’ actions. 

TWAIL contests the idea that foreign investment is essential to economic development, hence, not worthy of receiving total protection. This text does not have the intention to demonise FDIs, but to demonstrate the absurdity of their legal protection over SOEs as drivers of progression and development. 

Several Mexican opposition leaders argued that the EIL violates international agreements, such as the Paris Agreement and the newly created Canada-United States-Mexico Agreement. All of them avoided the fact that the RE never achieved the essence of its alleged developmental aims, by surrendering the sovereignty of the MES. Moreover, there is evidence of foreign meddling coming from the United States, which calls into question the legislative sovereignty behind the reform. Marquez cites several moments in which American policy intended to rule over the MES, mentioning deals taken by the American government, such as the 1928’s Achnacarry Agreement, and promoting them through events such as the Connecting the Americas 2022 Summit. 

AMLO promised to dismantle the RE during his presidency, but said strategy would entail indemnifying the FDIs, pending the determination by Investor-State dispute resolution panels. TWAIL not only would be useful to argument the illegitimacy and illegality under which the RE was legislated, but to prove that the development it promised was never realised 

NEOLIBERAL LEGALITY

Brabazon identifies law as one of the catalysts (if not the main one) in the creation of neoliberalism, hence, the concept of ‘neoliberal legality’. It evolved from the concept of ‘liberal legality’, legitimising the legal order through the alleged neutrality of the law, and is deemed a constitutive of the social field. Palacios Lleras depicts the state’s shift from a direct provider of goods and services to a regulator of competing private interests, supporting the contention that state regulation has in fact increased. All these characteristics were present during the RE years.

Neoliberal interests defined what would be considered legal and, furthermore, constitutional within the MES, ailing a protective cloth to their interests. Competition was the most important change brought to the CPEUM through the RE. In several governmental documents and statements of intent, the EPN administration highlighted the importance of the concept while seeking better prices in the MES. It justified opening up the electricity market to PPs (in generation and commercialisation activities), stating that the prices would adjust to the real consumption of the users. Two of the most important enclaves of the EPN administration began a vindication campaign regarding the liberalisation of the MES. Energy Secretary Pedro Joaquin Coldwell, in the Public Administration Journal, and Federal Commission of Electricity (CFE)’s Enrique Ochoa Reza in Milenio, both argued that ‘lower prices’ would be a direct consequence of the competition within the reformed MES. 

However, academics suspected the veracity of the correlation raised by the Peñista administration. Cardenas argues that the RE was an attempt to privatise public law, citing the securitisation of national reserves in foreign stock exchanges, or the subordination of ejidals and indigenous property for the purposes of energy reform. Vargas Suarez suggested that the RE intended to farm out PEMEX. Finally, Angles Hernandez mentioned the RE was a direct violation of vulnerable groups’ human rights.

The liberalisation of the MES occurred, according to a research done by Fundar, under a weaker fiscal regime of the contracts ‘than the one that applied to PEMEX until then and, above all, it remains to be defined in each contracting process and not by law.’ While under this neoliberal legality, the Executive Power had discretionary powers to determine the amounts to be paid by PPs. In addition, lax transparency and a weak accountability legal framework regulating the public trust Mexican Petroleum Fund for Stabilisation and Development made the MES susceptible to corruption. 

In the case of the RE, the insertion of neoliberal concepts such as ‘competition’ and ‘development’ in Article 25 CPEUM led to the autonomy of the Federal Economic Competition Commission (COFECE) and the creation of competition tribunals:

‘The law will (…) contribute to national economic development, promoting competitiveness and implementing a national policy for sustainable industrial development that includes sectoral and regional aspects, in the terms established by this Constitution.’

The RE legislators deemed ‘development’ as an economic consequence of competitiveness. The parties that opposed the RE indicated that, under those conditions, PEMEX would arrive at a disadvantage to compete with new MES’ entrants. To further mould the concepts inside the MES, the RE modified 46 other legal instruments. With these conditions present, the RE set adequate conditions for FDIs to be defended through the COFECE and the tribunals—something which would have been impossible in the previous normative order.

AMLO’S REFORM

After AMLO came to power in 2018, he started to revert EPN’s constitutional reforms (including the RE). Regarding the MES, AMLO’s first strike was the enactment of the EIL. After its approval, the President applauded the decision by stating:

‘It is no longer the time that politicians were at the service of companies (…) You can continue doing business legally, without bribes and with reasonable profits.’

Not long after the enactment of AMLO’S Reform, several private parties and political opposition leaders presented constitutional challenges against the modifications proposed by AMLO, alongside the COFECE’s constitutional controversy, presented on April 22^nd, 2021. As expected, since the RE was modified to allow antitrust litigation, the judicial power awarded a tsunami of suspensions, applicable to all companies within the MES—including those seeking protection, since otherwise it would be contravening the principle of competition. COFECE released a press release stating the following:

‘(…) the Decree is contrary to the Constitution and eliminates the necessary conditions for there to be a dynamic of competition in the electricity market, which would result in a disturbance in the supply conditions of electricity, as well as well as damage to the consumer and the economy in general.’

This is the first time in which both the COFECE and the competition tribunals aligned themselves against a federal reform project. In a country full of monopolies (telecommunications, television, bakery industry, corn and tortillas, soft drinks and bottlers, mining, and cement industry), it is particularly interesting that the argument of ‘damage to the consumer and the economy in general’ has not been used against other industries that directly impact Mexicans’ taxpayers pockets. For example, the Belisario Dominguez Institute of the Senate has pointed out that COFECE lacks efficiency against the tortilla and milk monopolies (two key items in Mexicans’ nutrition), and has not acted against the monopolies in the telecommunications and broadcasting. 

For an organism that has existed since 1992, the COFECE pays notable attention to a sector that—since the PE—was intended to be a State monopoly. Moreover, the argument that the so-called ‘qualified users’ and ‘electricity supply companies’ must acquire ‘Clean Energy Certificates’ for the implementation of technological improvements of the participating companies (which would facilitate them to interconnect to transmission networks) implies that the SOEs stand at a technological disadvantage in front of the PPs with direct FDIs at the MES. 

There is significant evidence that during the liberalisation of the MES there were acts of bribery conducted by people of the EPN’s administration to obtain the necessary votes to modify the CPEUM. Moreover, some of the bribed politicians benefited from the RE, since they had large investments in wind farms in Reynosa. Furthermore, diverse groups of indigenous people of Mexico have denounced abuses coming from these new investments. AMLO uses these facts to speak against the RE. He stated:

‘They did not like that I sent a reform initiative to the electricity sector because private companies had taken over the electricity industry, buying, bribing corrupt authorities.’

However, this discourse lacks real legal impact to avoid corruption or abuses protected by the deformed Principio de Legalidad that give legal protection to private parties participating in the MES. It implies criminal prosecution that might not be sufficient legal grounds to terminate the contracts signed under the RE. It cannot be stated (with legal certainty) that all the contracts derived from the RE were negotiated under such circumstances. Therefore, until proven, the President’s allegations are a mere an unproven refutation. Further constitutional redrafting is to be done to strengthen the MES, preventing any setbacks before constitutional tribunals in the future.

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Photo by Bhargava Marripati on Unsplash