STZ Constellation Brands Inc

By Santiago Pérez 

Residents in the border city of Mexicali voted against the completion of a $1.4 billion brewery owned by Constellation Brands Inc. on grounds that its intensive water consumption was detrimental for the community, a move that risks undermining foreign investment in Mexico as the country faces a deep economic contraction.

The administration of nationalist President Andrés Manuel López Obrador organized the public consultation on Saturday and Sunday. Farmers had complained that Constellation's water-intensive plant threatened to intensify irrigation shortages in the agriculture sector.

Around 76% of those who voted rejected the project developed by Constellation, the third-largest U.S. beer producer and the brewer of Mexico's Corona and Modelo brands for U.S. consumers. Turnout was less than 5% of eligible voters.

As a result of the vote, the government won't grant a water-supply permit to Constellation Brands, Deputy Interior Minister Diana Álvarez said Monday. The federal government will soon begin talks with Constellation to look for compensation for incurred losses, Ms. Álvarez said, after disclosing the results of the referendum.

The cancellation of such a large project sends a negative signal to foreign investors, business groups say. This is the first time Mexico's government has put a big foreign investment project to a public referendum, even as foreign direct investment shrank last year and the country's economy is expected to nosedive amid the coronavirus pandemic.

Fixed investment in Mexico fell 4.9% last year from 2018, contributing to a mild contraction in economic activity. Economists polled Friday by local bank Citibanamex expect gross domestic product to contract 3% in 2020, compared with an estimate of 0.7% growth just two weeks before.

The vote comes as the company was close to completing construction of the plant with all required government approvals. It began construction on the site in 2016 and planned to finish it next year. Constellation said it has already spent some $900 million on the nearly completed brewery.

The company aimed to provide 750 jobs in Mexicali. But farmers complain that they have already been forced to pull tens of thousands of acres out of production because of water shortages.

"Farmers were not taken into account when this project was launched," said René Prieto, a forage, corn and alfalfa producer in the Mexicali Valley who voted against the plant's construction. "I am in favor of the investment, but we were never notified that the water that was for the agriculture sector would now be for industrial use."

Mr. López Obrador said he will meet with the company's management and evaluate a possible relocation of the plant to a region with greater water sources.

"We have to listen to the people and govern with the popular mandate," Mr. López Obrador said Monday.

"Of course, foreign investment matters to us, but we must take people's opinions into account and take care of our natural resources.," he said at his daily news conference.

The country's top business confederation said the referendum was conducted in an irresponsible way as coronavirus infections spread rapidly across the country.

"Carrying out a referendum to determine the viability of a private investment project that has all the permits violates the current legal framework and creates an environment of legal uncertainty in Mexico," the organization said in a written statement on Sunday.

Constellation Brands officials declined to comment before Mr. López Obrador's news conference on Monday. The company has said the project meets all regulations and laws, and that its operations pose no risk to local water supplies.

Mr. López Obrador is using the consultations for significant infrastructure decisions. Before taking office in late 2018, he organized a four-day referendum on a $13 billion airport project that was underway for the country's capital. Only 1.2% of registered voters turned out, but he canceled the project after 70% of those who participated rejected it.

He organized another referendum in the Yucatán Peninsula for the approval of the Maya Train, a $7.4 billion, 950-mile tourist railway that runs through Mexico's largest rainforest. More than 92% of those who participated voted in favor.

But the consultations have sparked strong objections, in part because business groups say they are poorly organized, voter turnout is low and the selection of issues put to a public vote is arbitrary. Equally worrying are their use to replace the central role of the government to preserve the rule of law and regulate private investment projects, business leaders say.

In the case of the Mexicali referendum, it was an incomplete and irregular consultation, said Ernesto Elorduy, head of the Mexicali chapter of employer federation Coparmex.

"The turnout is unlikely to be representative of Mexicali's population. It was a disorganized consultation and carried out during the most important public health contingency in the history of Mexico," he said.

He added that there were just 10 polling stations in urban areas for more than one million residents, and 17 polling stations in rural areas where people strongly opposed construction.

"The result is irrelevant. These types of policy decisions must be made by federal and local authorities and regulatory agencies," he said.

More than half of Constellation's 9,000 workers are based in Mexico, where the company has invested more than $9 billion over the past six years. The company has said it wants to keep making its Mexican brands in Mexico but would look elsewhere if it can't expand in the country.

Mexico is the world's largest beer exporter, generating some $4 billion in sales of brands such as Corona. The country is the main source of imported beer in the U.S., with more than a 70% market share.

Write to Santiago Pérez at santiago.perez@wsj.com

(END) Dow Jones Newswires

March 23, 2020 12:35 ET (16:35 GMT)

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