Evolution of the Mining Law and Industry Governance
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Evolution of the Mining Law and Industry Governance

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Mon, 10/21/2013 - 11:44

At various times during its lifespan Mexico’s Mining Law has been characterized as excessively liberal, nationalistic, and protectionist. Today it is considered to be an efficient law with an effective regulatory framework that allows both domestic and international mining companies to operate safely and with sufficient freedom within the industry, though it has taken many years of amendments and adaptations to arrive at this stage.

The mining industry has existed in Mexico for hundreds of years and it is natural that there has been so much change around the question of how the law should protect or exploit the country’s vast mineral wealth. The framework has been largely influenced by the evolution of the government agenda over time. “From my point of view, the legislation in place should correspond with the realities of the industry that it regulates. I believe that Mexico’s mining legislation has generally fulfilled this function, since it has historically been linked to the economic and political reality of the country, and it has regulated the mining industry according to that reality,” says Karina Rodríguez Matus, Partner at PS&RM Abogados.

History has shown this to be true. After a period of heavy mining during Spanish colonization that saw much of Mexico’s mineral wealth sent abroad and little regulation over the industry, the country has taken its time to develop a legal structure that balances making the most of foreign investment and ensuring material benefit for Mexico. Under the rule of Porfirio Díaz (1876-1911) industry and mining grew exponentially, and in 1884 he created the Mining Code, considered by Rodríguez Matus to be the first Mexican mining law. This code was the most liberal mining law that the country has ever known. It placed no limits on foreign investment in and ownership of mining companies, and while some of the wealth created from mining finally started to benefit Mexico, that wealth was concentrated in the hands of only a few privileged Mexicans. The many foreign mining companies that flooded the market also continued to send much of the profits from mining abroad. Though there was a brief period during the mid- 19th century when mining regulation was placed under the responsibility of the individual states where miningactivities were being carried out, in 1883 Díaz moved it back to become the responsibility of the Mexican State, where it has remained ever since.

During his rule Díaz placed much emphasis on the export market, whilst simultaneously failing to stimulate domestic production. By 1910 there were severe food shortages throughout Mexico, and Díaz’s administration was characterized by extreme poverty and expropriation of communal land, and dissatisfaction was beginning to show. The Mexican Revolution followed, lasting 10 years. In the midst of the Revolution, in 1917, a new Constitution was drawn up. Article 27 did away with the liberalism inherent in Díaz’s mining law, emphasizing state ownership of all mineral wealth in Mexican lands and waters. Foreign investment, however, was still not restricted and remained significant until 1961, when the mining industry was nationalized. “Before the 1960s foreign investment in the Mexican mining industry was allowed by the government,” explains Abdón Hernández Esparza, President of the Legislative Commission of Camimex. “However, starting in that decade, all tax incentives and subsidies were restricted to companies 

hat were at least 51% owned by a national company. Then, in the 1970s, a new, more restrictive mining law was enacted. This encouraged further government intervention in mining activities. In order to create a mining company the Undersecretary of Mines first had to grant approval, and transferring a concession from one mining company to another required permits from the Bureau of Mines. In general, regulations were tougher.” This period of decreased foreign investment and increased government control in the mining industry both reduced investment in the industry and increased bureaucracy. “The foreign exchange controls imposed by the López Portillo administration in particular led to international companies creating a number of subsidiaries in order to carry out their operations in Mexico. As an example, at that time Peñoles had some 65 subsidiary companies,” adds Hernández Esparza.

Government regulation and protectionism remained a permanent feature of the Mining Law in Mexico until the start of the 1990s, when the government began to pursue a more 

neoliberal agenda. “The Mining Law of 1992 was created to better meet the needs of the industry and it eliminated the excessive regulations of the 1975 law,” says Federico Kunz Bolaños, Partner at Kunz Abogados and former head of the General Coordination of Mining. “There used to be a lot of rules for managing contracts and corporations; the former law was a regulation-heavy one. Nowadays, the law follows more neoliberal principles.”

The 1992 modifications to the mining law put the wheels in motion for a real change in the industry, which was consolidated by the signing of the North American Free Trade Agreement (NAFTA) in 1994. NAFTA removed trade tariffs and stimulated trade between Canada, the US and Mexico. The 1992 Mining Law also states that all mining companies, whether carrying out exploration or exploitation work, can now be 100% foreign owned. Many companies have taken advantage of this, with international investment in mining in Mexico amounting to more than 40% of the industry’s overall funding. For the first time, changes to Article 27 in the same year now permitted the lease or sale of ejido land, which was a positive move for the mining industry, making much more land potentially available for exploration and exploitation.

The mining law has not changed significantly since 1992, despite further changes that were made in 2005. For example, exploration and exploitation concessions are no longer separated, and are valid for 50 years on a renewable basis. Indigenous or farming communities are now also permitted to obtain mining concessions, and are given preferential rights over other applicants, a significant sign of progress for indigenous land rights given that concessions are usually issued on a first come first served basis. While the 1992 Mining Law marked a positive step for the industry, stimulating growth and renewed opportunity for investment, some criticize that it also marked a reduction in the priority given to mining by the government. It included the dissolution of the Undersecretary for Mining Affairs, and the repositioning of mining as the responsibility of the Ministry of Economy, where it still sits.

There is a feeling among some in the industry that this is not the right structure. Given that the mining industry is the fourth most significant contributor to Mexico’s GDP, they believe that it should be given more importance in the governmental hierarchy. There is significant support for the transformation of the General Coordination of Mining into a body that has more autonomy and more control over its budget. Talking about what an improved structure might look like, Kunz Bolaños says: “I do not think it would be very different from the current structure of mining authorities. The problem does not have to do with the actual decision-making centers or organizations, it has more to do with the importance the federal government places on the industry. We are not talking about a different structure; we are talking about autonomy in decision- making and in budget management.”

While there is significant support for a change in the way that the mining authority is structured, there is no agreement over how the revised structure should look. For example, Rodrigo Sánchez Mejorada Velasco, Partner at Sánchez-Mejorada, Velasco y Ribé, agrees that a regulatory body with more autonomy and control over its own budget would be positive for the industry. However, his concern is that too much change would be more disruptive than productive, and that whilst having the different mining entities together under one umbrella might seem more practical, it could lead to additional bureaucracy within mining processes. “I am not sure that grouping substantially different activities within one entity makes sense. Financing, for example, is a whole different activity from geological knowledge acquisition, or granting concessions, or promoting mining. There will be a conflict of interest between lending money and promoting mining, and I fear that the pressure that will build up will not allow the lending branch to work properly as a financing institution,” he says. Where mining lawyers like Kunz Bolaños, Sánchez Mejorada and Rodríguez Matus do agree is that mining would probably fit logically under the Ministry of Energy as opposed to the Ministry of Economy.

For all intents and purposes the new administration appears to be conscious that mining should be given higher priority; Peña Nieto has promoted investment in Mexican mining during international trips, and made mining one of the key areas for development under the Pact for Mexico.

ARTICLE 27 OF CONSTITUTION

Article 27 of the Mexican Constitution states that all lands and waters within Mexican territory are the property of the Nation, and that it is the Nation’s sole right to transfer ownership of property to private persons or entities. Landowners have property rights over the surface of the ground, but all natural resources that lie beneath the surface of the ground belong to the Nation.

In terms of mining, Article 27 states that the exploitation, use, or appropriation of such resources belonging to the Nation is permitted only by those in possession of a concession granted by the State. Whilst the article states that only Mexicans are allowed to own a mining concession, foreign entities may also own a mining concession provided that they are registered in Mexico.

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