Doing Business in Mexico’s Rural Areas

As this article is being written, Mexico is just a few days from determining its future for the next six years. While I am no expert in politics, I do have  some experience to highlight some relevant issues for both Mexican and foreign investors looking to do business in rural areas of Mexico. This is a must nowadays, considering that urban areas are over-exploited and industrial parks, tourism complexes and other industries are facing the necessity to deal with rural communities.

First of all, we must consider that Mexico is in its vast majority formed by rural areas, where the land is mainly owned by ejidos or agrarian communities. The land was granted to or recognized as belonging to groups of people after the Mexican Revolution under the idea  the land belongs to whomever works it (la tierra es de quien la trabaja). I would personally add: “and who lives there.”

The above is most important, mainly considering that Mexico has been  part of the ILO Convention on Indigenous and Tribal People (ILO Convention) since 1992.

Upon the ILO Convention, Mexico amended Article 2 of its Constitution granting protection to Indigenous communities; however, the Mexican Federal Congress and Executive Branch have failed to issue the respective federal law (and regulations) to  set the grounds on how such rights and obligations of the Mexican federation must be applied, guaranteed, protected and enforced.

This means that after more than 20 years, Mexican authorities have not taken the time to determine how such rights and obligations must be applied, keeping in mind that under the ILO Convention, such a law and regulations must be actually consulted as stated in the Convention.

Because of reasons that this author sees as only political, the legislative power has not taken the time to even determine and establish what an Indigenous community is, how the rights of Indigenous communities are to be protected, and most importantly, how Indigenous consultations must be conducted by the federal state, in order for them to be freely informed and what steps must be followed depending on the outcome of such an Indigenous consultation.

Derived from the above, Mexican and foreign investors have been facing conflicts because  in the eyes of society, such investors breach the human rights of Indigenous communities while trying to invest in this country.

We must also consider that even the nation’s Supreme Court of Justice, in October 2020, ordered the Federal Congress to issue the federal law that will determine the way in which the rights of Indigenous communities in Mexico must be addressed.

Investors must consider the need to protect as much as possible their current and future projects, taking into consideration the lack of federal legislation on Indigenous consultation and understanding that some Mexican states have made efforts to issue their own respective law to address this issue.

In this author’s experience, there are several alternatives that investors should follow to protect their interests, and to create relevant precedents that demonstrate  that contrary to the general belief, their projects do not negatively affect Indigenous communities and, in fact, help such communities to receive the benefits granted by the ILO Convention and by the Constitution of the Mexican United States.

These alternatives include:

• The elaboration of a Baseline Study, which will help to identify all social aspects in the area of the project and in adjacent zones (areas of influence), depending on the case.

• Conduct through a third non-related party an Evaluation on Social Impacts (Evaluación de Impacto Social) that the project may cause to the community in the area of the project.

• In any agreement entered into with a rural community, accurately express the social situation (organization) of the respective community, respect uses and customs.

• Create as many benefits as possible for the community where the project is located.

• Create as many jobs as possible in the area of the project.

• Work on a sustainable project that may include economic benefits for the community, making sure that any amount payable under whichever agreement complies with as many of the benefits created by the ILO Convention as possible.

• Any economic benefit from the project should be properly distributed to the community, and if possible, enter into a trust agreement that would ensure that the funds are actually used for the betterment of the community.

• Consider the possibility of helping the community in forming an association, complying with Mexican regulations, which in the future could also help the respective community to receive deductible donations from third parties.

• Avoid being involved in any manner whatsoever in how the association is formed and internally managed, but make sure that the Trust Agreement actually creates the benefits and ensures the funds are used in a proper and transparent way.

• On a case by case basis, ensure any other benefit  for the community in education, health, communication, environment, protection of human rights, inclusion, among others.

• Explain and promote the fact that development and a better way of life in no way means the disturbance or affectation of their respective “ancestral uses and customs,” if any.

While readers may think that payments to communities in addition to any “normal” negotiation could bring significant losses to the respective project, this author strongly believes that it is better and more profitable for any project to be able to work without interruption through the investment in its community, and that if the project shares with the community, the community will have its own legitimate interest in continuing to work; but most important and above all, investors will dramatically reduce expenses to defend projects of any nature.

Ensuring environmental and social benefits are now a worldwide must. Many foreign investors know that these benefits are a must and know how to apply them in other jurisdictions. It is time to do so in Mexico.

Of course and after 35 years in the area of community relationships (negotiating in rural areas), this author is also aware of a new amendment to Article 2d of the Constitution of the Mexican United States (proposed by President Andres Manuel Lopez Obrador), that was not discussed in this past legislative period, but is pending to be studied and most likely approved in the near future.

Among others, this amendment will create (as proposed) an additional payment of 5% (of profits) investors will have to pay to the Indigenous community in the area where the project resides. This proposal implies that this 5% will be paid to the community through the Federation, which will distribute the funds to the community after the community has obtained its respective Federal Tax Identification number (a process that would also need approval from the Mexican authorities).