Identifier
Created
Classification
Origin
07MEXICO212
2007-01-16 20:50:00
UNCLASSIFIED
Embassy Mexico
Cable title:  

MEXICO 2007 INVESTMENT CLIMATE STATEMENT -- PART I

Tags:  ECON EINV KTDB OPIC USTR ELAB ETRD EFIN PGOV 
pdf how-to read a cable
VZCZCXRO9210
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #0212/01 0162050
ZNR UUUUU ZZH
P 162050Z JAN 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 4935
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPCIM/CIMS NTDB WASHDC PRIORITY
UNCLAS SECTION 01 OF 07 MEXICO 000212 

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA
STATE FOR WHA/MEX

E.O. 12958: N/A
TAGS: ECON EINV KTDB OPIC USTR ELAB ETRD EFIN PGOV
MX
SUBJECT: MEXICO 2007 INVESTMENT CLIMATE STATEMENT -- PART I

REF: 06 SECSTATE 178303


This is part one of a two part cable that provides suggested text
for the 2007 Mexico Investment Climate Statement.

Openness to Foreign Investment

Mexico is open to foreign direct investment (FDI) in most economic
sectors and has consistently been one of the largest recipients of
FDI among emerging markets. In recent years, however, Mexico has
become less competitive relative to other emerging economies,
particularly China, but also India and countries in Eastern Europe,
as it has failed to address serious crime and safety issues or
pass much needed fiscal, labor and energy sector reforms. Recent
reports from AT Kearney, Transparency International, the World
Economic Forum and the Organization for Economic Cooperation and
Development (OECD) have detailed the perceived decline in Mexico's
attractiveness as an investment destination.

Foreign investment in Mexico has largely been concentrated in the
northern states close to the U.S. border where most maquiladoras are
located, and in the Federal District of Mexico City. The Yucatan
peninsula, historically an area for tourism investment, has seen
industry in other sectors grow due in part to the ability to quickly
send goods from its ports to the United States. Financial services,
automotive and electronic sectors have received the largest amounts
of FDI. Historically, the United States has been the largest source
of FDI in Mexico. As of September, U.S. investors had provided
61.5 percent of 2006 FDI.

The Government of Mexico has had some success in simplifying the
process of investing in Mexico. The Secretariat of Economy (SECON)
maintains a Spanish-language website (www.economia.gob.mx)
offering an array of information, forms, links and transactions.
Among other options, interested parties can download import/export
permit applications, make on-line tax payments, and chat with
on-line advisors who can answer specific investment and trade
related questions.

The SECON website also contains a link to the Rapid Business
Start-Up System (SARE),set up through an executive decree by
President Fox in January 2002. SARE reduces the time and number of
government formalities required to open a low-risk business. State
governments, notably Nuevo Leon, have also passed small business
facilitation measures to make it easier to open businesses. Despite
progress however, according to a World Bank study it takes on
average 27 days to complete all paperwork required to start a
business in Mexico; compared to an average OECD figure of 17 days.
The Embassy advises potential investors to contact SECON for
detailed information on investing in Mexico. The address and
telephone number for SECON is:
Secretaria de Economia,

SIPDIS
Alfonso Reyes No. 30,
Col. Hipodromo Condesa
C.P. 06179,
Mexico, D.F.
Tel: 52-55-5729-9100

The 1993 Foreign Investment Law is the basic statute governing
foreign investment in Mexico. The law is consistent with the
foreign investment chapter of NAFTA (the North American Free
Trade Agreement). It provides national (i.e. non-discriminatory)
treatment for most foreign investment, eliminates performance
requirements for most foreign investment projects, and liberalizes
criteria for automatic approval of foreign investment.

The Foreign Investment Law identifies 704 activities, 656 of
which are open for 100 percent FDI stakes. There are 18 activities
in which foreigners may only invest 49 percent; 13 of which require
Foreign Investment National Commission approval for a 100 percent
stake; 5 reserved for Mexican nationals; and 10 reserved for the
Mexican state.

Below is a summary of activities subject to investment restrictions.

TABLE I
SECTION 1: SECTORS RESERVED FOR THE STATE IN WHOLE OR IN PART:

A) Petroleum and other hydrocarbons;
B) Basic petrochemicals;
C) Telegraphic and radio telegraphic services;
D) Radioactive materials;
E) Electric power generation, transmission, and distribution;
F) Nuclear energy;
G) Coinage and printing of money;

MEXICO 00000212 002 OF 007


H) Postal service;
I) Airports;
J) Control, supervision and surveillance of ports and heliports.

SECTION 2: SECTORS RESERVED FOR MEXICAN NATIONALS:

A) Retail sales of gasoline and liquid petroleum gas;
B) Non-cable radio and television services;
C) Credit Unions, Savings and Loan Institutions, and Development
Banks;
D) Certain professional and technical services;
E) Domestic transportation for passengers, tourism and freight,
except for messenger or package delivery services.

U.S. and Canadian investors generally receive national and
most-favored-nation treatment in setting up operations or acquiring
firms. Exceptions exist for investments for which the Government of
Mexico recorded its intent in NAFTA to restrict certain industries
to Mexican nationals. U.S. and Canadian companies have the right
under NAFTA to international arbitration and the right to transfer
funds without restrictions. NAFTA also eliminated some barriers to
investment in Mexico, such as trade balancing and domestic content
requirements. Local governments must also accord national treatment
to investors from NAFTA countries. Mexico is also a party to several
OECD agreements covering foreign investment, notably the Code of
Liberalization of Capital Movements and the National Treatment
Instrument.

Approximately 95 percent of all foreign investment transactions
do not require government approval. Foreign investments requiring
applications and not exceeding USD 165 million are automatically
approved, unless the proposed investment is in a sector subject to
restrictions by the Mexican constitution and Foreign Investment
Law that reserve certain sectors for the state and Mexican nationals
(see Table 1). The National Foreign Investment Commission determines
whether investments in restricted sectors may go forward and has 45
working days to make a decision. Criteria for approval include
employment and training considerations, technological contributions,
and contributions to productivity and competitiveness. The
Commission may reject applications to acquire Mexican companies for
national security reasons. The Secretariat of Foreign Relations
(SRE) must issue a permit for foreigners to establish or change the
nature of Mexican companies.

Energy
------

The Mexican constitution reserves ownership of the petroleum and
other hydrocarbon reserves located within Mexico. Oil and gas
exploration and production efforts are under the sole purview of
Pemex, Mexico's petroleum parastatal. The constitution also
provides that most electricity service may only be supplied by two
state-owned companies, the Federal Electricity Commission (CFE) and
Central Power and Light (LYFC). There has been some opening to
private capital. Private electric co-generation and self-supply are
now allowed. Private investors may build independent power projects
but all of their output must be sold to the Federal Electricity
Commission in wholesale transactions. Private construction of
generation for export is permitted. In 1995, amendments to the
Petroleum Law opened transportation, storage, marketing and
distribution of natural gas imports and issued open access
regulations for Pemex's natural gas transportation network. Retail
distribution of Mexico's natural gas is open to private investment,
as is the secondary petrochemical industry. Since the government's
announcement in August 2001 that national and foreign private
firms will be able to import liquefied petroleum gas duty-free,
one LNG terminal has begun operation in Tamaulipas state, a second
is under construction in Baja California, and CFE is bidding a
third on Mexico's Pacific Coast.

Multiple Service Contracts (MSCs),designed to comply with the
country's constitution, mark Mexico's most ambitious effort to
attract private companies to stimulate natural gas production by
developing non-associated natural gas fields. Under an MSC contract,
private companies will be responsible for 100 percent of the
financing of a contract and will be paid for the work performed and
services rendered. However, the natural gas produced in a specific
field remains the property of Pemex. Examples of work that
contractors can perform include seismic processing and
interpretation, geological modeling, fields engineering, production
engineering, drilling, facility design and construction, facility
and well maintenance, and natural gas transportation services. Some
Mexican politicians still oppose MSCs as a violation of the Mexican
constitution's ban on concessions. Some contracts have failed to
attract any bids, demonstrating the limited success of MSCs.
Minor changes to the regime through which Pemex remits funds to the

MEXICO 00000212 003 OF 007


Federal Government passed in November 2005 and further limited
changes are contemplated in the current legislative session to
reform specific aspects of Pemex's commercial operations.

Telecommunications
------------------

Mexico allows up to 49 percent FDI in companies that provide
telecommunications networks and services. This includes the Cable
TV (CATV) industry, with one exception: companies can issue Neutral
or "N" stocks up to 99 percent, which can be owned by a foreign
company. In fact, one CATV company operates under this ownership
scheme. There is no limit on FDI in companies providing cellular
services. However, Telmex continues to reign as the dominant
telecom power and wields significant influence over key regulatory
and government decision makers. Mexico's dominant landline and
wireless carriers are traded on the New York Stock Exchange.

Several large U.S. and international telecom companies are active
in Mexico, partnering with Mexican companies or holding minority
shares. Following a 2004 WTO ruling, international resellers are
authorized to operate in Mexico and so some companies are also
looking to sell wholesale minutes to resellers. Telcel
(technically independent, but majority owned by Telmex owner's
Grupo Carso) still retains a majority share (about 70 percent) of
the cellular market. However, Spain's Telefonica Movistar, among
others, continues to grow and challenge the status quo. They have
deployed extensive mobile infrastructure to increase coverage
around the country.

Telmex continues and will continue to dominate the market in Long
Distance (local and international),Internet access through DSL,
and bundle services. A new Convergence Accord, published in October,
allows Telmex to offer broadcasting or TV services. The Federal
Telecommunications Commission has not found any legal reason
that Telmex would be required to pay a fee to the government for
the privilege, but the Secretariat of Economy is reviewing the
issue. The accord has elicited strong concerns from the CATV
industry, which fears that it will push CATV operators to
consolidate. However, under the accord, CATV operators (including
TV duopolist Televisa's Cablevision) will also be allowed to begin
providing telephone services, which might increase competition
in the telephony market.

As in telecommunications, there are concerns that the two dominant
television companies - Televisa and TV Azteca, who share duopoly
status in the sector - continue to exercise influence over Mexican
judicial, legislative, policy, and regulatory bodies to prevent
competition. The Radio and Television Law passed in March 2006
has been criticized as catering to the interests of dominant
industry players by imposing permanent disadvantages on new entrants
as compared to the current dominant duopoly.

U.S. firms remain unable to penetrate the Mexican television
broadcast market, despite the fact that both Televisa and TV Azteca
benefit from access to the U.S. market. TV Azteca has used the
Mexican legal system to harass a U.S. firm trying to enter this
sector. This harassment included TV Azteca personnel directing a
raid, with the support of Mexico City auxiliary police, on
production facilities for the purpose of stopping production of a
show in Mexico for U.S. Spanish-speaking audiences and thereby
obtaining relief that Azteca could not legitimately obtain in the
United States. Mexico's television ad market is estimated to be
worth in excess of 2.5 USD billion annually.

Real Estate
-----------

Investment restrictions still prohibit foreigners from acquiring
title to residential real estate in so-called "restricted zones"
within 50 kilometers (approximately 30 miles) of the nation's
coast and 100 kilometers (approximately 60 miles) of the borders.
In all, the restricted zones total about 40 percent of Mexico's
territory. Nevertheless, foreigners may acquire the effective use of
residential property in the restricted zones through the
establishment of a 50-year extendible trust (called a fideicomiso)
arranged through a Mexican financial institution that acts as trustee.

Under a fideicomiso the foreign investor obtains all rights of use
of the property, including the right to develop, sell and transfer
the property. Real estate investors should, however, be careful in
performing due diligence to ensure that there are no other claimants
to the property being purchased. Fideicomiso arrangements have
led to legal challenges in some cases. Title insurance has recently
become available in Mexico and a few major U.S. title insurers have
begun operations here.

MEXICO 00000212 004 OF 007



Transport
---------

The Mexican government allows up to 49 percent foreign ownership of
50-year concessions to operate parts of the railroad system,
renewable for a second 50-year period. The Mexican Foreign Investment
Commission and the Mexican Federal Competition Commission (CFC) must
approve ownership above 49 percent. In a positive sign for
competition, the CFC recently struck down a proposed merger between
two of the three major railroad companies. The decision may still
be appealed. Consistent with NAFTA, foreign investors from the
U.S. and Canada are now permitted to own up to 100 percent of local
trucking and bus companies, however, several companies have
encountered long wait times and legal tie-ups when trying to obtain
permits.

CINTRA, the government holding company for the Mexican airline
groups, Mexicana and Aeromexico, sold Grupo Mexicana to Grupo
Posadas in December 2005. Rumors of plans to sell Grupo Aeromexico
still abound, although the timing of the proposed sale is still
uncertain. These sales, coupled with the emergence of new low-cost
start-ups are likely to change the dynamics of Mexican aviation
in the short to medium term. Despite blossoming competition, foreign
ownership of Mexican airlines is capped at 25 percent. Foreign
ownership in airports is limited to 49 percent. Express delivery
service companies continue to complain that Mexican legislation
unfairly favors Mexican companies by restricting the size of trucks
international carriers are allowed to use.

Conversion and Transfer Policies

Mexico has open conversion and transfer policies as a result of its
membership in NAFTA and the OECD. In general, capital and investment
transactions, remittance of profits, dividends, royalties, technical
service fees, and travel expenses are handled at market-determined
exchange rates. Peso/dollar foreign exchange is available on same-
day, 24- and 48-hour settlement bases. Most large foreign exchange
transactions are settled in 48 hours. In June 2003, the U.S. Federal
Reserve Bank and the Bank of Mexico announced the establishment of an
automated clearinghouse for cross-border financial transactions. The
International Electronic Funds Transfer System (TEFI) began
operating in 2004 and commissions on transfers through the system
have dropped rapidly.

Expropriation and Compensation

Under NAFTA, Mexico may not expropriate property, except for a
public purpose and on a non-discriminatory basis. Expropriations
are governed by international law, and require rapid fair market
value compensation, including accrued interest. Investors have the
right to international arbitration for violations of this or any
other rights included in the investment chapter of NAFTA. There
have been twelve arbitration cases, six of which are still pending,
filed against Mexico by U.S. and Canadian investors who allege
expropriation, and other violations of Mexico's NAFTA obligations.
Details of the cases can be found at the Department of State
Website, Office of the Legal Advisor (www.state.gov/s/l).

Dispute Settlement

Chapter Eleven of NAFTA contains provisions designed to protect
cross-border investors and facilitate the settlement of investment
disputes. For example, each NAFTA Party must accord investors from
the other NAFTA Parties national treatment and may not expropriate
investments of those investors except in accordance with
international law.

Chapter Eleven permits an investor of one NAFTA Party to seek money
damages for measures of one of the other NAFTA Parties that allegedly
violate those and other provisions of Chapter Eleven. Investors may
initiate arbitration against the NAFTA Party under the Arbitration
Rules of the United Nations Commission on International Trade
Law ("UNCITRAL Rules") or the Arbitration (Additional Facility) Rules
of the International Center for Settlement of Investment Disputes
("ICSID Additional Facility Rules"). Alternatively, a NAFTA investor
may choose to use the registering country's court system.

The Mexican government and courts recognize and enforce arbitral
awards. The Embassy has heard of no actions taken in the Mexican
courts for an alleged Chapter 11 violation on behalf of U.S. or
Canadian firms.

There have been numerous cases in which foreign investors,
particularly in real estate transactions, have spent years dealing
with Mexican courts trying to resolve their disputes. Often real

MEXICO 00000212 005 OF 007


estate disputes occur in popular tourist areas such as the Yucatan.
American investors should understand that under Mexican law many
commercial disputes that would be treated as civil cases in the U.S.
could also be treated as criminal proceedings in Mexico. Based upon
the evidence presented a judge may decide to issue arrest warrants.
In such cases Mexican law also provides for a judicial official to
issue an "amparo" (injunction) to shield defendants from arrest.
U.S. investors involved in commercial disputes should therefore
obtain competent Mexican legal counsel, and inform the U.S. Embassy
if arrest warrants are issued.

Performance Requirements and Incentives

The 1993 Foreign Investment Law eliminated export requirements
(except for maquiladora industries),capital controls, and domestic
content percentages, which are prohibited under NAFTA. Foreign
investors already in Mexico at the time the law became effective
could apply for cancellation of prior commitments. Foreign investors
who failed to apply for the revocation of existing performance
requirements remained subject to them.

The Mexican federal government has eliminated direct tax incentives,
with the exception of accelerated depreciation. A comprehensive
fiscal reform package including changes to corporate, individual, and
other taxes has been proposed. Some changes to tax law under this
framework were approved with the 2005 Revenue Bill, reducing
income tax rates on a gradual basis. Needed comprehensive fiscal
reform has stalled although the current administration has indicated
it will pursue the matter in the coming years. Investors should
follow this development closely as whatever reforms that ultimately
emerge could have implications for investors.

Most taxes in Mexico are federal; therefore, states have limited
opportunity to offer tax incentives. However, Mexican states have
begun competing aggressively with each other for investments, and
most have development programs for attracting industry. These
include reduced price (or even free) real estate, employee training
programs, and reductions of the 2 percent state payroll tax, as well
as real estate, land transfer, and deed registration taxes. Four
northern states - Nuevo Leon, Coahuila, Chihuahua and Tamaulipas -
have signed an agreement with the state of Texas to facilitate
regional economic development and integration. Investors should
consult the Finance, Economy, and Environment Secretariats, as well
as state development agencies, for more information on fiscal
incentives. Tax attorneys and industrial real estate firms can also
be good sources of information.

U.S. Consulates have reported that the states in their consular
districts have had to modify their incentive packages due to
government decentralization. Many states have also developed unique
industrial development policies. Sonora, for example, is working to
expand the free entry area for tourists (south from the border to the
port of Guaymas). Sonora is one state that has implemented long-term
agriculture and infrastructure development plans. The government of
Yucatan provides information and support to potential investors and
business entrepreneurs through several programs that target
different industries such as technology, agroindustry and energy
exploration.

There is a government-owned development bank, Nacional Financiera,
S.A. (www.nafin.com),which provides loans to companies in priority
development areas and industries. It is active in promoting joint
Mexican-foreign ventures for the production of capital goods.
Nacional Financiera offers preferential, fixed-rated financing for
the following types of activities: small and medium businesses;
environmental improvements; studies and consulting assistance;
technological development; infrastructure; modernization; and
capital contribution. The Mexican Bank for Foreign Trade,
Bancomext, offers a variety of export financing and promotion
programs (www.bancomext.com).

Mexico has two programs to stimulate manufactured exports -
maquiladora and PITEX (Program for Temporary Imports to produce
Exports) - that largely operate in the same manner. The first is
focused on companies that specialize in in-bond manufacturing and
export, while the second is for companies that may have significant
domestic sales. In November 2006, the maquiladora and PITEX programs
were combined into the renamed IMMEX (Industria Manufacturera,
Maquiladora y Servicios de Exportacion) program. The IMMEX program
adds services, such as business process outsourcing, to the maquila
scheme and also simplifies and streamlines the processes under the
two previous schemes. The new program will continue to exempt
companies from import duties and applicable taxes (e.g. VAT) on
inputs and components incorporated into exported manufactured goods.
In addition, capital goods and the machinery used in the production
process are tax exempt, but are currently subject to import duties.

MEXICO 00000212 006 OF 007


Companies interested in investing in industrial activity in Mexico
need to follow the new IMMEX guidelines closely, preferably in close
consultation with locally based legal advisors. Please refer to
the Secretariat of Economy's IMMEX program website at:
http://www.economia.gob.mx/?P=2297

In order to maintain competitiveness of maquiladora and PITEX
companies and comply with NAFTA provisions, since 2001 Mexico has
applied "Sectoral Promotion Programs" (PROSEC). Under these programs,
most favored nation import duties on listed inputs and components
used to produce specific products are eliminated, or reduced
to a competitive level. These programs comply with NAFTA provisions
because import duty reduction is available to all producers, whether
the final product is sold domestically or is exported to a NAFTA
country. Currently there are 22 PROSECs, including electronics
and home appliances, automotive and auto-parts, textile and apparel,
footwear, and others. The lists of inputs and components incorporated
under each PROSEC are not exhaustive, and the Mexican government
regularly consults with industries to include more goods.

In the last three years the Secretariat of Economy conducted, in
partnership with the private sector, 12 studies, called "Programs for
Sectoral Competitiveness", of the country's most important sectors
according to their levels of exports, employment and FDI. Studies
covering the electronics, automotive, textile, maquiladora, leather
and footwear, and software sectors are currently available at the
website of the Secretary of Economy:
(http://www.economia.gob.mx/index.jsp?P=944).

Right to Private Ownership and Establishment

Foreign and domestic private entities are permitted to establish and
own business enterprises and engage in all forms of remunerative
activity in Mexico, except those enumerated in Section 1 Table
UNCLAS SECTION 01 OF 07 MEXICO 000212

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA
STATE FOR WHA/MEX

E.O. 12958: N/A
TAGS: ECON EINV KTDB OPIC USTR ELAB ETRD EFIN PGOV
MX
SUBJECT: MEXICO 2007 INVESTMENT CLIMATE STATEMENT -- PART I

REF: 06 SECSTATE 178303


This is part one of a two part cable that provides suggested text
for the 2007 Mexico Investment Climate Statement.

Openness to Foreign Investment

Mexico is open to foreign direct investment (FDI) in most economic
sectors and has consistently been one of the largest recipients of
FDI among emerging markets. In recent years, however, Mexico has
become less competitive relative to other emerging economies,
particularly China, but also India and countries in Eastern Europe,
as it has failed to address serious crime and safety issues or
pass much needed fiscal, labor and energy sector reforms. Recent
reports from AT Kearney, Transparency International, the World
Economic Forum and the Organization for Economic Cooperation and
Development (OECD) have detailed the perceived decline in Mexico's
attractiveness as an investment destination.

Foreign investment in Mexico has largely been concentrated in the
northern states close to the U.S. border where most maquiladoras are
located, and in the Federal District of Mexico City. The Yucatan
peninsula, historically an area for tourism investment, has seen
industry in other sectors grow due in part to the ability to quickly
send goods from its ports to the United States. Financial services,
automotive and electronic sectors have received the largest amounts
of FDI. Historically, the United States has been the largest source
of FDI in Mexico. As of September, U.S. investors had provided
61.5 percent of 2006 FDI.

The Government of Mexico has had some success in simplifying the
process of investing in Mexico. The Secretariat of Economy (SECON)
maintains a Spanish-language website (www.economia.gob.mx)
offering an array of information, forms, links and transactions.
Among other options, interested parties can download import/export

permit applications, make on-line tax payments, and chat with
on-line advisors who can answer specific investment and trade
related questions.

The SECON website also contains a link to the Rapid Business
Start-Up System (SARE),set up through an executive decree by
President Fox in January 2002. SARE reduces the time and number of
government formalities required to open a low-risk business. State
governments, notably Nuevo Leon, have also passed small business
facilitation measures to make it easier to open businesses. Despite
progress however, according to a World Bank study it takes on
average 27 days to complete all paperwork required to start a
business in Mexico; compared to an average OECD figure of 17 days.
The Embassy advises potential investors to contact SECON for
detailed information on investing in Mexico. The address and
telephone number for SECON is:
Secretaria de Economia,

SIPDIS
Alfonso Reyes No. 30,
Col. Hipodromo Condesa
C.P. 06179,
Mexico, D.F.
Tel: 52-55-5729-9100

The 1993 Foreign Investment Law is the basic statute governing
foreign investment in Mexico. The law is consistent with the
foreign investment chapter of NAFTA (the North American Free
Trade Agreement). It provides national (i.e. non-discriminatory)
treatment for most foreign investment, eliminates performance
requirements for most foreign investment projects, and liberalizes
criteria for automatic approval of foreign investment.

The Foreign Investment Law identifies 704 activities, 656 of
which are open for 100 percent FDI stakes. There are 18 activities
in which foreigners may only invest 49 percent; 13 of which require
Foreign Investment National Commission approval for a 100 percent
stake; 5 reserved for Mexican nationals; and 10 reserved for the
Mexican state.

Below is a summary of activities subject to investment restrictions.

TABLE I
SECTION 1: SECTORS RESERVED FOR THE STATE IN WHOLE OR IN PART:

A) Petroleum and other hydrocarbons;
B) Basic petrochemicals;
C) Telegraphic and radio telegraphic services;
D) Radioactive materials;
E) Electric power generation, transmission, and distribution;
F) Nuclear energy;
G) Coinage and printing of money;

MEXICO 00000212 002 OF 007


H) Postal service;
I) Airports;
J) Control, supervision and surveillance of ports and heliports.

SECTION 2: SECTORS RESERVED FOR MEXICAN NATIONALS:

A) Retail sales of gasoline and liquid petroleum gas;
B) Non-cable radio and television services;
C) Credit Unions, Savings and Loan Institutions, and Development
Banks;
D) Certain professional and technical services;
E) Domestic transportation for passengers, tourism and freight,
except for messenger or package delivery services.

U.S. and Canadian investors generally receive national and
most-favored-nation treatment in setting up operations or acquiring
firms. Exceptions exist for investments for which the Government of
Mexico recorded its intent in NAFTA to restrict certain industries
to Mexican nationals. U.S. and Canadian companies have the right
under NAFTA to international arbitration and the right to transfer
funds without restrictions. NAFTA also eliminated some barriers to
investment in Mexico, such as trade balancing and domestic content
requirements. Local governments must also accord national treatment
to investors from NAFTA countries. Mexico is also a party to several
OECD agreements covering foreign investment, notably the Code of
Liberalization of Capital Movements and the National Treatment
Instrument.

Approximately 95 percent of all foreign investment transactions
do not require government approval. Foreign investments requiring
applications and not exceeding USD 165 million are automatically
approved, unless the proposed investment is in a sector subject to
restrictions by the Mexican constitution and Foreign Investment
Law that reserve certain sectors for the state and Mexican nationals
(see Table 1). The National Foreign Investment Commission determines
whether investments in restricted sectors may go forward and has 45
working days to make a decision. Criteria for approval include
employment and training considerations, technological contributions,
and contributions to productivity and competitiveness. The
Commission may reject applications to acquire Mexican companies for
national security reasons. The Secretariat of Foreign Relations
(SRE) must issue a permit for foreigners to establish or change the
nature of Mexican companies.

Energy
--------------

The Mexican constitution reserves ownership of the petroleum and
other hydrocarbon reserves located within Mexico. Oil and gas
exploration and production efforts are under the sole purview of
Pemex, Mexico's petroleum parastatal. The constitution also
provides that most electricity service may only be supplied by two
state-owned companies, the Federal Electricity Commission (CFE) and
Central Power and Light (LYFC). There has been some opening to
private capital. Private electric co-generation and self-supply are
now allowed. Private investors may build independent power projects
but all of their output must be sold to the Federal Electricity
Commission in wholesale transactions. Private construction of
generation for export is permitted. In 1995, amendments to the
Petroleum Law opened transportation, storage, marketing and
distribution of natural gas imports and issued open access
regulations for Pemex's natural gas transportation network. Retail
distribution of Mexico's natural gas is open to private investment,
as is the secondary petrochemical industry. Since the government's
announcement in August 2001 that national and foreign private
firms will be able to import liquefied petroleum gas duty-free,
one LNG terminal has begun operation in Tamaulipas state, a second
is under construction in Baja California, and CFE is bidding a
third on Mexico's Pacific Coast.

Multiple Service Contracts (MSCs),designed to comply with the
country's constitution, mark Mexico's most ambitious effort to
attract private companies to stimulate natural gas production by
developing non-associated natural gas fields. Under an MSC contract,
private companies will be responsible for 100 percent of the
financing of a contract and will be paid for the work performed and
services rendered. However, the natural gas produced in a specific
field remains the property of Pemex. Examples of work that
contractors can perform include seismic processing and
interpretation, geological modeling, fields engineering, production
engineering, drilling, facility design and construction, facility
and well maintenance, and natural gas transportation services. Some
Mexican politicians still oppose MSCs as a violation of the Mexican
constitution's ban on concessions. Some contracts have failed to
attract any bids, demonstrating the limited success of MSCs.
Minor changes to the regime through which Pemex remits funds to the

MEXICO 00000212 003 OF 007


Federal Government passed in November 2005 and further limited
changes are contemplated in the current legislative session to
reform specific aspects of Pemex's commercial operations.

Telecommunications
--------------

Mexico allows up to 49 percent FDI in companies that provide
telecommunications networks and services. This includes the Cable
TV (CATV) industry, with one exception: companies can issue Neutral
or "N" stocks up to 99 percent, which can be owned by a foreign
company. In fact, one CATV company operates under this ownership
scheme. There is no limit on FDI in companies providing cellular
services. However, Telmex continues to reign as the dominant
telecom power and wields significant influence over key regulatory
and government decision makers. Mexico's dominant landline and
wireless carriers are traded on the New York Stock Exchange.

Several large U.S. and international telecom companies are active
in Mexico, partnering with Mexican companies or holding minority
shares. Following a 2004 WTO ruling, international resellers are
authorized to operate in Mexico and so some companies are also
looking to sell wholesale minutes to resellers. Telcel
(technically independent, but majority owned by Telmex owner's
Grupo Carso) still retains a majority share (about 70 percent) of
the cellular market. However, Spain's Telefonica Movistar, among
others, continues to grow and challenge the status quo. They have
deployed extensive mobile infrastructure to increase coverage
around the country.

Telmex continues and will continue to dominate the market in Long
Distance (local and international),Internet access through DSL,
and bundle services. A new Convergence Accord, published in October,
allows Telmex to offer broadcasting or TV services. The Federal
Telecommunications Commission has not found any legal reason
that Telmex would be required to pay a fee to the government for
the privilege, but the Secretariat of Economy is reviewing the
issue. The accord has elicited strong concerns from the CATV
industry, which fears that it will push CATV operators to
consolidate. However, under the accord, CATV operators (including
TV duopolist Televisa's Cablevision) will also be allowed to begin
providing telephone services, which might increase competition
in the telephony market.

As in telecommunications, there are concerns that the two dominant
television companies - Televisa and TV Azteca, who share duopoly
status in the sector - continue to exercise influence over Mexican
judicial, legislative, policy, and regulatory bodies to prevent
competition. The Radio and Television Law passed in March 2006
has been criticized as catering to the interests of dominant
industry players by imposing permanent disadvantages on new entrants
as compared to the current dominant duopoly.

U.S. firms remain unable to penetrate the Mexican television
broadcast market, despite the fact that both Televisa and TV Azteca
benefit from access to the U.S. market. TV Azteca has used the
Mexican legal system to harass a U.S. firm trying to enter this
sector. This harassment included TV Azteca personnel directing a
raid, with the support of Mexico City auxiliary police, on
production facilities for the purpose of stopping production of a
show in Mexico for U.S. Spanish-speaking audiences and thereby
obtaining relief that Azteca could not legitimately obtain in the
United States. Mexico's television ad market is estimated to be
worth in excess of 2.5 USD billion annually.

Real Estate
--------------

Investment restrictions still prohibit foreigners from acquiring
title to residential real estate in so-called "restricted zones"
within 50 kilometers (approximately 30 miles) of the nation's
coast and 100 kilometers (approximately 60 miles) of the borders.
In all, the restricted zones total about 40 percent of Mexico's
territory. Nevertheless, foreigners may acquire the effective use of
residential property in the restricted zones through the
establishment of a 50-year extendible trust (called a fideicomiso)
arranged through a Mexican financial institution that acts as trustee.

Under a fideicomiso the foreign investor obtains all rights of use
of the property, including the right to develop, sell and transfer
the property. Real estate investors should, however, be careful in
performing due diligence to ensure that there are no other claimants
to the property being purchased. Fideicomiso arrangements have
led to legal challenges in some cases. Title insurance has recently
become available in Mexico and a few major U.S. title insurers have
begun operations here.

MEXICO 00000212 004 OF 007



Transport
--------------

The Mexican government allows up to 49 percent foreign ownership of
50-year concessions to operate parts of the railroad system,
renewable for a second 50-year period. The Mexican Foreign Investment
Commission and the Mexican Federal Competition Commission (CFC) must
approve ownership above 49 percent. In a positive sign for
competition, the CFC recently struck down a proposed merger between
two of the three major railroad companies. The decision may still
be appealed. Consistent with NAFTA, foreign investors from the
U.S. and Canada are now permitted to own up to 100 percent of local
trucking and bus companies, however, several companies have
encountered long wait times and legal tie-ups when trying to obtain
permits.

CINTRA, the government holding company for the Mexican airline
groups, Mexicana and Aeromexico, sold Grupo Mexicana to Grupo
Posadas in December 2005. Rumors of plans to sell Grupo Aeromexico
still abound, although the timing of the proposed sale is still
uncertain. These sales, coupled with the emergence of new low-cost
start-ups are likely to change the dynamics of Mexican aviation
in the short to medium term. Despite blossoming competition, foreign
ownership of Mexican airlines is capped at 25 percent. Foreign
ownership in airports is limited to 49 percent. Express delivery
service companies continue to complain that Mexican legislation
unfairly favors Mexican companies by restricting the size of trucks
international carriers are allowed to use.

Conversion and Transfer Policies

Mexico has open conversion and transfer policies as a result of its
membership in NAFTA and the OECD. In general, capital and investment
transactions, remittance of profits, dividends, royalties, technical
service fees, and travel expenses are handled at market-determined
exchange rates. Peso/dollar foreign exchange is available on same-
day, 24- and 48-hour settlement bases. Most large foreign exchange
transactions are settled in 48 hours. In June 2003, the U.S. Federal
Reserve Bank and the Bank of Mexico announced the establishment of an
automated clearinghouse for cross-border financial transactions. The
International Electronic Funds Transfer System (TEFI) began
operating in 2004 and commissions on transfers through the system
have dropped rapidly.

Expropriation and Compensation

Under NAFTA, Mexico may not expropriate property, except for a
public purpose and on a non-discriminatory basis. Expropriations
are governed by international law, and require rapid fair market
value compensation, including accrued interest. Investors have the
right to international arbitration for violations of this or any
other rights included in the investment chapter of NAFTA. There
have been twelve arbitration cases, six of which are still pending,
filed against Mexico by U.S. and Canadian investors who allege
expropriation, and other violations of Mexico's NAFTA obligations.
Details of the cases can be found at the Department of State
Website, Office of the Legal Advisor (www.state.gov/s/l).

Dispute Settlement

Chapter Eleven of NAFTA contains provisions designed to protect
cross-border investors and facilitate the settlement of investment
disputes. For example, each NAFTA Party must accord investors from
the other NAFTA Parties national treatment and may not expropriate
investments of those investors except in accordance with
international law.

Chapter Eleven permits an investor of one NAFTA Party to seek money
damages for measures of one of the other NAFTA Parties that allegedly
violate those and other provisions of Chapter Eleven. Investors may
initiate arbitration against the NAFTA Party under the Arbitration
Rules of the United Nations Commission on International Trade
Law ("UNCITRAL Rules") or the Arbitration (Additional Facility) Rules
of the International Center for Settlement of Investment Disputes
("ICSID Additional Facility Rules"). Alternatively, a NAFTA investor
may choose to use the registering country's court system.

The Mexican government and courts recognize and enforce arbitral
awards. The Embassy has heard of no actions taken in the Mexican
courts for an alleged Chapter 11 violation on behalf of U.S. or
Canadian firms.

There have been numerous cases in which foreign investors,
particularly in real estate transactions, have spent years dealing
with Mexican courts trying to resolve their disputes. Often real

MEXICO 00000212 005 OF 007


estate disputes occur in popular tourist areas such as the Yucatan.
American investors should understand that under Mexican law many
commercial disputes that would be treated as civil cases in the U.S.
could also be treated as criminal proceedings in Mexico. Based upon
the evidence presented a judge may decide to issue arrest warrants.
In such cases Mexican law also provides for a judicial official to
issue an "amparo" (injunction) to shield defendants from arrest.
U.S. investors involved in commercial disputes should therefore
obtain competent Mexican legal counsel, and inform the U.S. Embassy
if arrest warrants are issued.

Performance Requirements and Incentives

The 1993 Foreign Investment Law eliminated export requirements
(except for maquiladora industries),capital controls, and domestic
content percentages, which are prohibited under NAFTA. Foreign
investors already in Mexico at the time the law became effective
could apply for cancellation of prior commitments. Foreign investors
who failed to apply for the revocation of existing performance
requirements remained subject to them.

The Mexican federal government has eliminated direct tax incentives,
with the exception of accelerated depreciation. A comprehensive
fiscal reform package including changes to corporate, individual, and
other taxes has been proposed. Some changes to tax law under this
framework were approved with the 2005 Revenue Bill, reducing
income tax rates on a gradual basis. Needed comprehensive fiscal
reform has stalled although the current administration has indicated
it will pursue the matter in the coming years. Investors should
follow this development closely as whatever reforms that ultimately
emerge could have implications for investors.

Most taxes in Mexico are federal; therefore, states have limited
opportunity to offer tax incentives. However, Mexican states have
begun competing aggressively with each other for investments, and
most have development programs for attracting industry. These
include reduced price (or even free) real estate, employee training
programs, and reductions of the 2 percent state payroll tax, as well
as real estate, land transfer, and deed registration taxes. Four
northern states - Nuevo Leon, Coahuila, Chihuahua and Tamaulipas -
have signed an agreement with the state of Texas to facilitate
regional economic development and integration. Investors should
consult the Finance, Economy, and Environment Secretariats, as well
as state development agencies, for more information on fiscal
incentives. Tax attorneys and industrial real estate firms can also
be good sources of information.

U.S. Consulates have reported that the states in their consular
districts have had to modify their incentive packages due to
government decentralization. Many states have also developed unique
industrial development policies. Sonora, for example, is working to
expand the free entry area for tourists (south from the border to the
port of Guaymas). Sonora is one state that has implemented long-term
agriculture and infrastructure development plans. The government of
Yucatan provides information and support to potential investors and
business entrepreneurs through several programs that target
different industries such as technology, agroindustry and energy
exploration.

There is a government-owned development bank, Nacional Financiera,
S.A. (www.nafin.com),which provides loans to companies in priority
development areas and industries. It is active in promoting joint
Mexican-foreign ventures for the production of capital goods.
Nacional Financiera offers preferential, fixed-rated financing for
the following types of activities: small and medium businesses;
environmental improvements; studies and consulting assistance;
technological development; infrastructure; modernization; and
capital contribution. The Mexican Bank for Foreign Trade,
Bancomext, offers a variety of export financing and promotion
programs (www.bancomext.com).

Mexico has two programs to stimulate manufactured exports -
maquiladora and PITEX (Program for Temporary Imports to produce
Exports) - that largely operate in the same manner. The first is
focused on companies that specialize in in-bond manufacturing and
export, while the second is for companies that may have significant
domestic sales. In November 2006, the maquiladora and PITEX programs
were combined into the renamed IMMEX (Industria Manufacturera,
Maquiladora y Servicios de Exportacion) program. The IMMEX program
adds services, such as business process outsourcing, to the maquila
scheme and also simplifies and streamlines the processes under the
two previous schemes. The new program will continue to exempt
companies from import duties and applicable taxes (e.g. VAT) on
inputs and components incorporated into exported manufactured goods.
In addition, capital goods and the machinery used in the production
process are tax exempt, but are currently subject to import duties.

MEXICO 00000212 006 OF 007


Companies interested in investing in industrial activity in Mexico
need to follow the new IMMEX guidelines closely, preferably in close
consultation with locally based legal advisors. Please refer to
the Secretariat of Economy's IMMEX program website at:
http://www.economia.gob.mx/?P=2297

In order to maintain competitiveness of maquiladora and PITEX
companies and comply with NAFTA provisions, since 2001 Mexico has
applied "Sectoral Promotion Programs" (PROSEC). Under these programs,
most favored nation import duties on listed inputs and components
used to produce specific products are eliminated, or reduced
to a competitive level. These programs comply with NAFTA provisions
because import duty reduction is available to all producers, whether
the final product is sold domestically or is exported to a NAFTA
country. Currently there are 22 PROSECs, including electronics
and home appliances, automotive and auto-parts, textile and apparel,
footwear, and others. The lists of inputs and components incorporated
under each PROSEC are not exhaustive, and the Mexican government
regularly consults with industries to include more goods.

In the last three years the Secretariat of Economy conducted, in
partnership with the private sector, 12 studies, called "Programs for
Sectoral Competitiveness", of the country's most important sectors
according to their levels of exports, employment and FDI. Studies
covering the electronics, automotive, textile, maquiladora, leather
and footwear, and software sectors are currently available at the
website of the Secretary of Economy:
(http://www.economia.gob.mx/index.jsp?P=944).

Right to Private Ownership and Establishment

Foreign and domestic private entities are permitted to establish and
own business enterprises and engage in all forms of remunerative
activity in Mexico, except those enumerated in Section 1 Table 1.
Private enterprises are able to freely establish, acquire and
dispose of interests in business enterprises. The two most common
types of business entities are corporations (Sociedad Anonima) and
limited partnerships (Sociedad de Responsibilidad Limitada). Under
these legal entities a foreign company may operate an independent
company, a branch, affiliate, or subsidiary company in Mexico.
The rules and regulations for starting an enterprise differ for each
structure.

Corporation Limited Liability Company
(Sociedad Anonima) (Sociedad de Responsibilid Limitada)

Can be up to 100 Can be up to 100
percent foreign-owned. percent foreign-owned.

Must have a minimum Must have a minimum of
of 50,000 Mexican 3,000 Mexican pesos in capital stock
pesos in capital stock to start.
to start.

Must have minimum of Must have a minimum of
2 shareholders, with 2 partners to incorporate
no maximum. Board of a corporation with limited
Directors can run the liability. The partners
administration of the must manage the company.
company.

The enterprise has an Exists only while there
indefinite life span. is a business purpose and
partners remain the same.

Free transferability Restricted transferability
of stock ownership is of partnership shares.
permitted. Any changes in the
partnership composition
may cause the partnership
to be liquidated.

Operational losses If structured properly,
incurred by the it may offer tax advantages
Mexican entity or by allowing operational
subsidiary may not be losses incurred by the
used by the U.S. Mexican entity to be used
parent company. by the U.S. parent company.

Limited liability Limited liability is
to shareholders. afforded the partners.

Protection of Property Rights

Two different laws provide the core legal basis for protection of
intellectual property rights (IPR) in Mexico -- the Industrial

MEXICO 00000212 007 OF 007


Property Law (Ley de Propiedad Industrial) and the Federal Copyright
Law (Ley Federal del Derecho de Autor). Multiple federal agencies
are responsible for various aspects of IPR protection in Mexico.
The Office of the Attorney General (Procuradur!a General de la
Republica, or PGR) has a specialized unit that pursues criminal IPR
investigations. The Mexican Institute of Industrial Property
(Instituto Mexicano de la Propiedad Industrial, or IMPI) administers
Mexico's trademark and patent registries and is responsible for
handling administrative cases of IPR infringement. The National
Institute of Author Rights (Instituto Nacional del Derecho de Autor)
administers Mexico's copyright register and also provides legal
advice and mediation services to copyright owners who believe their
rights have been infringed. The Mexican Customs Service (Aduana
MQxico) plays a key role in ensuring that illegal goods do not cross
Mexico's borders.

Despite strengthened enforcement efforts by Mexico's federal
authorities over the past several years, weak penalties and other
obstacles to effective IPR protection have failed to deter the
rampant piracy and counterfeiting found throughout the country.
The U.S. Government continues to work with its Mexican counterparts
to improve the business climate for owners of intellectual property.
Please refer to the Embassy's IPR Toolkit for more information:
http://mexico.usembassy.gov/mexico/IPR.html

Mexico is a signatory of at least fifteen international treaties,
including the Paris Convention for the Protection of Industrial
Property, the NAFTA, and the WTO Agreement on Trade-related Aspects
of Intellectual Property Rights. Though Mexico signed the Patent
Cooperation Treaty in Geneva, Switzerland in 1994, which allows for
simplified patent registration procedure when applying for patents
in more than one country at the same time, it is necessary to
register any patent or trademark in Mexico in order to claim an
exclusive right to any given product. A prior registration in the
United States does not guarantee its exclusivity and proper use in
Mexico, but serves merely as support for the authenticity of any
claim you might make, should you take legal action in Mexico.

An English-language overview of Mexico's IPR regime can be found
on the WIPO website at:
http://www.wipo.int/about-ip/en/ipworldwide/p df/mx.pdf

Although a firm or individual may apply directly, most foreign firms
hire local law firms specializing in intellectual property.
The U.S. Embassy's Commercial Section maintains a list of such law
firms in Mexico at:
http://www.buyusa.gov/mexico/en/business_serv ice_providers.html


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity
GARZA