Constellation Brands has Mexico against the wall, thanks to NAFTA

The suspension of a Constellation Brands brewery in Mexicali would bring Mexico closer to a new international controversy over expropriation, as established by the North American Free Trade Agreement (NAFTA).

To avoid going to trial before an international panel, the Andrés Manuel López Obrador government can negotiate compensation that can compensate for the economic damage to the company that distributes Grupo Modelo’s brands in the United States.

According to Article 11 of NAFTA, the value of a possible compensation must be equivalent to “the fair market value of the expropriated investment immediately before the expropriation measure has been carried out.”

The work located in the Mexicali Valley requires a total investment of $ 1.4 billion, of which Constellation Brands has exercised $ 900 so far, according to company figures.

In addition, a possible sanction would also imply other financial damages derived from the suspension of the project.

The latter would include the fall in the stock market that the firm suffered, after the publication of the results of the consultation that determined the suspension of the new facilities in Mexicali, says Michel Zelaya Viesca, expert in foreign trade at the firm Santamarina y Steta.

For the moment, the approach to the controversy before an international panel favors the company, says Leonel Carrano, professor of economics at the National Autonomous University of Mexico (UNAM).

“In such a case, the international panel would give Constellation a greater advantage, because NAFTA is written to protect mainly the private sector from government actions,” says the expert.

Prior Government inheritance

Construction of the brewery in Mexicali began in 2017, with the endorsement of the administration of former Governor Francisco Vega de Lamadrid, also known as Kiko Vega.

However, on March 21 and 22 of this year, the Ministry of the Interior (Segob) made a consultation in Baja California about the continuity of the work, due to multiple disagreements that it caused in a sector of the population.

The results of the exercise determined that 76.1% of the participants demonstrated against the work, while only 23.2% voted in favor and 0.7% canceled their participation.

The 36,781 participants in the consultation, however, represent only 4.6% of the Mexicali electoral register and 1.3% at the state level, according to the most recent data from the Baja California Electoral Institute.

Padrón electoral en Baja California hasta abril de 2019

Chart
Padrón
Ensenada403,072
Mexicali796,447
Tecate86,437
Tijuana1,433,597
Rosarito96,957
Total2,816,510

After the publication of the results, the National Water Commission (Conagua) announced that it would not give the authorizations to finish the brewery, in addition to leaving the discharge permit issued by the previous administration “without effect.

This measure first announced by Segob is equivalent to an “indirect expropriation”, according to experts consulted by THE CEO .

Article 10 of Chapter 11 on NAFTA Investment, signed by the United States, Mexico and Canada in 1993, establishes that neither party can adopt measures “equivalent to expropriation”.

The only peaceful way to take a resolution of this type is by paying compensation to the affected company, as established in the trade agreement.

According to Zelaya Viesca, the negotiation of a compensatory payment would include the investment of $ 900 million that Constellation Brands has reported so far, but also the loss of value of the company after the announcement of the cancellation

The firm’s shares fell 11.75% during Monday’s session, bringing the brewery’s shares to $ 105.64, their lowest price since January 2015, when they traded at $ 103.05.

The amount of compensation is still impossible to calculate, the interviewees agree. “It will depend on the negotiating capacity of the federal government and the flexibility of the company,” says Carrano.

The key to government

In his morning conference on Wednesday, López Obrador said that Constellation Brands committed corruption to obtain permits from the brewery in Mexicali.

He said that these permits will be reviewed and recalled the “great mobilizations” that arose against the project.

The main cause of opposition to the work is the lack of water resources in the area.

A study by the National Council of the National Council for Science and Technology (Conacyt) published in April 2019, found several irregularities in the documents and technical opinions for the construction of the plant in the border city.

For example, when Constellation Brands announced the investment in the Mexicali Valley, it guaranteed that the plant would use “less than 0.3% of the volume of water” that the area receives annually.

However, Conacyt’s technical analysis revealed that the reported volume included raw materials, not including cleaning, steam, and other activities in the production process.

In general, the study highlights six dubious aspects of the construction of the plant, among which are a high degree of opacity in the handling of information, the ‘fast track’ approval of the project, in addition to widespread social rejection.

Meanwhile, the business sector maintains that the permits were obtained legally.

The Business Coordinating Council (CCE) warned on Tuesday that the US company will sue the country, under NAFTA, to demand the payment of “damages”.

“If Conagua delivered the permits, it is because he knew exactly the technical and technological support of each action that should be taken,” said Carlos Salazar Lomelín in a conference call via remote questions asked by the CEO on the subject.

Constellation Brands, meanwhile, said it is willing to negotiate with the López Obrador administration.

However, the indications of the Mexican government are for “influentials” in obtaining authorizations for the industrial use of water.

The main challenge for the executive power will be to demonstrate that its assertions are true, and thus arrive in a less adverse situation to the negotiations or to the possible international commercial judgment.

Source: elceo.com

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