Modernisation drive: New PPP law is likely to attract private investment in infrastructure

Accompanying reforms in sectors such as energy and telecommunications, the government is rolling out an ambitious infrastructure development effort to support economic growth over the coming decades. President Enrique Peña Nieto announced in mid-2013 plans to channel MXN1.32trn ($102.56bn) to improve roads, airports, railroads and communications infrastructure. The World Economic Forum’s “Global Competitiveness Report 2014” ranked Mexico 66th out of 148 countries for the quality of its infrastructure.

The overhaul is expected to revive the construction sector, which was negatively affected by a slump in the housing market and sluggish activity for most of 2013. Despite a slowdown in public spending in 2013, largely due to the transition period between governments, as well as a focus on pushing constitutional reforms through the Senate, the effects of the infrastructure upgrade programme are expected to have an impact on the economy from 2014 onwards.

The Mexican Chamber for the Construction Industry (Cámara Mexicana de la Industria de la Construcción, CMIC) expects 4.5% growth in construction in 2014. A list of the 500 biggest construction projects for 2014, published by the CMIC, underlines the key role of the energy and transport sectors in the government’s 2014-18 spending plans. Already vital for the economy, the energy sector is set to attract a considerable amount of private investment in the near future, after a new energy bill was passed in the Mexican Congress. The new law will allow foreign companies to participate in the upstream hydrocarbons sector, which for 75 years has been exclusively controlled by state-owned Petróleos Mexicanos (Pemex).

MOVING GOODS: A substantial amount of investment will go to the transport sector. The Ministry of Transportation and Telecommunication’s budget for 2014 was increased by 50%, reaching MXN107bn ($8.3bn). Over the 2014-18 period 80% of transport projects will be related to road renovation and expansion, although the government is also focusing attention on port and airport infrastructure. A renovation of transport networks is essential for economic growth, considering Mexico’s role as a manufacturing platform. Exports of goods and services accounted for 33% of GDP in 2012, up from 27% in 2009, according to the World Bank.

A massive transport project that might see the light of day during the current presidential term is the construction of Mexico’s City new international airport. This was not detailed under the Ministry of Transport and Telecommunications’ investment plan for the sector, although the government has said that the initial studies have already started.

In the telecommunications sector, the government plans to deploy a fibre-optic network and build antennas across the country to expand broadband access. The expansion of Mexico’s telecommunications network is bound to attract considerable attention, and the government is expected to launch a tender for a public-private partnership (PPP) to carry out the project.

INVESTMENT SPENDING: The current infrastructure plan comes on top of past efforts from the previous administration. Under President Felipe Calderón authorities established the 2007-12 National Plan for Infrastructure. This is the country’s first far-reaching plan for infrastructure, mobilising $233.8bn and coming after a long period of underinvestment.

In the decade between 2000 and 2010, spending in infrastructure as a percentage of GDP grew from 3% to 4.9%, according to government figures. The energy sector took the lion’s share of the previous spending plan, with oil and gas accounting for $110.9bn and infrastructure for electricity generation and transmission an additional $35.1bn. Telecommunications was allocated $26.1bn, and $26.5bn was directed for highway construction and renovation.

Despite the previous government’s intentions, a number of the major projects included in the 2007-12 National Plan for Infrastructure were not executed, largely due to the global financial crisis, which reduced some of the federal government’s spending capacity.

The need for infrastructure renovation is especially prevalent in urban centres, where more than 78% of Mexicans now live, according to the World Bank. The growing population is putting pressure on infrastructure and increasing the need for better roads and improved access to electricity and water. The infrastructure drive is expected to address these gaps.

NEW PPP LAW: Approved in 2012, the new PPP law will be a key mechanism to attract private capital into infrastructure projects, since in the past a large majority of spending in the sector has come from the state. Between 2007 and 2009, for example, the federal government accounted for 82% of infrastructure expenditure. The key aspects governing Mexico’s PPP system became clear with the publication of the details of a new law in late 2013. The rights and obligations of both the private and the public parties were made more transparent. But more importantly, several obstacles that had served as deterrents to investment appear to have been cleared. The new law will allow private operators to sign contracts with the government that are based on general market standards, as opposed to having to adapt to specific state laws or different localised procurement rules. Also positive is an increase in the flexibility to change contracts once a project has begun. In addition, the new PPP law eases land acquisition, which has previously been a problem for investors.

The PPP law makes it possible for private operators to suggest projects of their own structuring, as opposed to just waiting for government tenders for specific infrastructure needs. This might prove the right type of incentive to encourage the private sector to be more proactive in the development of infrastructure projects.

Despite more flexible regulation, a challenge to swift execution of public investment projects might come from within the government itself over the coming years. Periodic changes of officials after elections have sometimes made it difficult to retain unified practices in terms of how tendering processes are managed. “There is a lack of qualified people in launching government tenders,” Francisco Ibáñez Cortina, lead partner for capital financing and infrastructure projects at PwC México, told OBG. He cited the example of a tender for the construction of the third metro line in the city of Monterrey, which had to be cancelled twice, after no companies filed offers due to a mismanaged tendering process. This might be partly mitigated in the future. The new PPP law, through its inclusion of projects originating from private partners, will also help to improve the tendering process.

“There is a lot of practice in structuring tenders for projects such as roads. But there are other infrastructure sectors in which the government will be able to use the private sector expertise in structuring and tendering projects correctly, such as health and education, for example,” Ibáñez added.

FINANCING: Easier access to financing schemes will be as necessary as aptly managed tendering processes. The banking sector’s ability to finance infrastructure projects has been limited mainly due to sector regulations that put more emphasis on collateral, as opposed to the viability of infrastructure projects.

Mexico’s Banco Nacional de Obras y Servicios Pú blicos, the state-owned development bank, is set to take a greater financing role acting as a backer, and using commercial banks and other financial institutions as intermediaries. This will help to encourage greater participation from the private banking sector.

Another important player will be the National Infrastructure Fund (Fondo Nacional de Infraestructura, FONADIN), which has had a role in financing public works projects since its creation by presidential decree in 2008. FONADIN works as an inclusion tool for the private sector to participate in government infrastructure projects, through the allocation of funding. Between 2008 and 2013 FONADIN provided MXN114.4bn ($1.1bn) to help build ports, railroads, water sanitation, railroads and energy projects. To facilitate access to bank and market finance for infrastructure development, the fund also provides certain guarantees for credit, securities, performance and political risk.

Other means are also set to attract more private capital. Recent easing of financial regulations allowed the creation of new investment instruments. In 2009 financial regulators created structured equity securities ( certificados de capital de desarrollo, CKDs), a hybrid of debt and equity that acts as listed funds on the stock exchange. These are fast becoming an important means of raising capital for infrastructure projects. Because they are listed, CKDs allow the Mexican pension funds to invest in them, helping to tap into the country’s most important institutional investor to execute infrastructure projects. Mexico’s pension funds are worth $170bn, according to Manuel Rodríguez Arregui, general manager at Grupo Bursátil Mexicano.

The plans for infrastructure spending will help mobilise large sections of the Mexican economy, and will have a positive impact on domestic construction companies. However, to keep attracting private investors into infrastructure development, Mexico will need to maintain economic stability and regulatory transparency.

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The Report: Mexico 2014

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