As the U.S. Congress begins its review of the U.S.-Mexico border trucking demonstration program and the global financial crisis continues to ripple through Mexico, U.S. and Canadian cargo transportation companies and other investors may wish to consider distressed asset investment opportunities in Mexico’s cargo transportation industry.

The following is a rough outline of the laws and rules governing foreign investment in Mexico’s cargo transportation industry, all of which (along with other laws) should be carefully considered in consultation with a licensed Mexican attorney (which I am not) before making any investment:

International Cargo Transportation Services

Mexico’s Foreign Investment Law (Ley de Inversion Extranjera) allows foreign companies to own 100% of the equity of a Mexican company that performs international cargo transportation services in Mexico, where “international cargo transportation services” generally means services involving the transport of cargo between points in Mexico and the United States or Canada but excluding services involving the transport of cargo between points within Mexico.

However, a permit from the Ministry of Communication and Transportation (Secretaria de Comunicacion y Transportes- SCT) is required to perform such international cargo transportation services and the SCT is not currently granting such permits. Indeed, the SCT has rejected all recent requests by Mexican companies with U.S. and other foreign shareholders seeking to engage in the international cargo transportation business. Several of the rejections are being contested in litigation in Mexico.

Although the requesting companies are expected to prevail in the litigation because the SCT’s rejection of their permits appears to be contrary to applicable Mexican law, the litigation could continue well into 2009 or 2010.

Domestic Cargo Transportations Services

Under the Foreign Investment law, a foreign company is not permitted to own any interest in a Mexican company that performs domestic cargo transportation services, where “domestic cargo transportation services” generally means services involving the transport of cargo between two points within Mexico.

The exception to that rule is that a foreign company may make an investment in a Mexican company that performs domestic cargo transportations services (and/or international cargo transportation services) in Mexico, provided that the investment is neutral and the Ministry of the Economy (Secretaria de la Economia) approves of the neutrality of the investment in advance. “Neutral” in this case usually means that the foreign company may own only preferred stock in the Mexican company with voting rights limited to material matters such as a change in corporate purpose, merger, acquisition, sale of assets, spin-off, etc.

The Ministry of the Economy has recently approved such neutral investments by U.S. investors in Mexican transportation companies. The Ministry almost invariably rejects the first application and requests additional information from the applicant regarding the proposed investment. The second submission of the application is often accepted. The Ministry of the Economy has 30 days to respond to each application for approval of neutral investment but generally responds within 15 days.

Demonstration Program

A third option for U.S. and Canadian cargo transportation companies that wish to do business with Mexico but not to make a direct investment in a Mexican company is to make application to the SCT for enrollment in the Mexican equivalent of the U.S.-Mexico border trucking demonstration program (programa demostrativo), which allows a U.S. or Canadian transportation company to enter Mexico with its own trucks, drivers, and trailers to perform international cargo transportation services. (The U.S. demonstration program, as promulgated by the U.S. Congress and the Department of Transportation, has allowed Mexican carriers to make deliveries into the interior of the U.S. since 2007.)

Two key requirements of the Demonstration Program are that the truck drivers of the foreign applicant be bilingual and the foreign company be a registered transportation company with the U.S. Department of Transportation or its Canadian counterpart. The applicant must provide a substantial amount of supplementary information with the application. Applications are typically adjudicated within 3-4 months after submission.