False Start

22 February 2017 Mexicos infrastructure plans have not lived up to the hype of 2014. Marina Formoso asks what happened, and finds that while optimism remains, planning issues are proving a big obstacle

When Mexican President Enrique Pena Nieto launched the National Plan of Infrastructure (PNI) in 2014, all eyes were on the country, anticipating the start of a new era of infrastructure development in the country.

After all, the Mexican economy remains limited due to the poor state of the most basic infrastructure: roads, ports and railroads in particular. Given its strategic position as a hub for goods transportation between the Gulf Coast – near the Panama Canal – and the Pacific Ocean, as well as a frontier between the north and south of America, the country needs infrastructure to take advantage of its location.

However, three years since the plan and almost at the end of Pena Nieto’s first term as president, the pipeline hasn’t made the progress that many had hoped. It now seems unlikely that the current president will be able to finish the program by the end of 2018. The plummet in oil prices, a legal framework that has been criticized for being overly complex, plus suggestions of a lack of planning are the main issues that have plagued progress.

However, such an ambitious program as that set out by the PNI was always going to take time to deliver.

“The national infrastructure program has made important progress, reaching, by the end of 2016, more than 50% of the budget forecast,” says Santiago Klein, international director at technical consultancy McBains Cooper. “Although significant progress has been made in the areas of highways (50%) and roads (70%), there are areas in which much work remains to be done, both in terms of transport and especially in social infrastructure.”

Klein and others remain optimistic about the use of the P3 model in the future. For a start, it still attracts interest from overseas investors. In January, for example, Spanish contractor OHL confirmed its Mexican subsidiary plans to invest $352m (MXN7.5bn) in the country this year.

“Something that I think is really positive is the quantity of Spanish companies that are investing in Mexico now,” says Alejandro Rojas, partner at law firm Nader, Hayaux & Goebel. “It would be even better if [other] European investors come as well.”

The exact number of PNI projects that would be launched under a P3 model has always been uncertain, as these details were not specified at the outset. Over the course of the program, some large projects have been released to the P3 market, such as the $7bn ‘Red Compartida’ broadband scheme, as well as transportation projects including the elevated La Raza – Santa Clara highway and the Querétaro – San Luis Potosí project.

To build confidence and momentum in the market, these deals will need to be completed on time and to budget.

“The government is slowly turning some of the PNI projects to P3s,” says Edmundo Gamas, executive director at the Mexican Institute of Infrastructure Development (IMEXDI).

However, like many in the industry, he believes that weak planning by the central government is a problem that will continue to dog projects, increasing timescales and costs.

“The problem remains in poor and insufficient planning before awarding the project,” argues Gamas. “Then the planning phase might continue during the bidding, financing and even construction phase, breaking with all the principles of orderly project management.”

Gustavo Arballo Luján, president of the Mexican Chamber of the Construction Industry, agrees that there is a lack of proper planning and clarity around projects, and warns this can have severe consequences. “In many cases projects are unclear, a major part of the risks are passed to the private sector and in the end the authorities apply the laws differently, which limits the participation of the private companies and sometimes it can lead to nonconformities and litigation.”

Part of this planning issue centers on property rights. There have been numerous reports of projects already awarded hitting trouble because rights of way haven’t been sorted out ahead of time. It has been suggested that as many as 40% of the gas pipeline projects and at least 60% of road schemes awarded remain on hold due to bureaucratic issues such as this.

“The evaluation of the rights of way normally takes too long, as well as the negotiation with the owners, the authorization and determination of the prices,” explains Luján.

Risk expert Alejandro Aurrecoechea, associate director for Mexico at Control Risks, agrees that the environment in Mexico is not always the easiest for investors, suggesting that risk mitigation strategies are required before, during and at the end of a project. “It is difficult for projects to progress as planned, even if all permits and licenses are in order,” he concludes.

However, there remains optimism among the industry that Mexico can deliver the development it needs, with experts suggesting that there are signs of progress. Rojas says it would not be fair to apply the same stigma to all the sectors in the pipeline, pointing out that health projects in particular are progressing as expected.

“I have been working on several P3 projects for hospitals and I can say that the planning has been adequate. It is true that there are problems in terms of planning and structuring but we cannot generalise,” he continues. “Also, these hospital projects have come from unsolicited proposals, which proves the interest of the [private sector].”

This year alone, at least eight hospital projects are in planning, all to be delivered under P3.

Economic drive

Meanwhile Pena Nieto’s government continues to focus on new initiatives and methods to drive investment and improve infrastructure – as well as raise the country’s economy.

For example, the government plans to implement a law for Special Economic Zones, after it was approved in 2016, following on from successful examples in countries such as China and India. These zones have not been formally established but they will involve fiscal incentives for national and international firms and the promotion of P3 projects in the 10 poorest states of Mexico.

The future of Mexico’s economy is, of course, currently uncertain, due to the large shadow cast by the aggressively anti-Mexican policies of the new Donald Trump administration in the US.

Beyond the president’s continued efforts to build a wall between the two countries – which the Mexicans could end up paying for through various punitive tax and trade agreements – Trump has also threatened firms that set up in Mexico that they will face hugely punitive import duties when trying to sell their goods in the US.

In January, the implications of this threat became clear when Ford cancelled plans for a new plant in Mexico. Furthermore, it seems likely that Trump will force a renegotiation of the North American Free Trade Agreement (NAFTA), which includes Canada, Mexico and the US and has long been cited by the US president as an example of a bad trade deal.

Mexico’s future economic prosperity, therefore, is far from clear. Boosting its own infrastructure – both as a means to increase short-term economic growth and to create a platform for long-term inward investment – is likely to be critical in the coming years.

“The government's infrastructure pipeline is still very ambitious,” says Klein. “Now it remains to be seen if, with the economic uncertainty generated in part by the US elections, the public investments will continue or [whether] it will lead to budgetary restrictions. In that situation, P3s would be fundamental and play a more important role in the development of the infrastructure.”

And some experts believe that one adjustment could help solve a number of the obstacles that have held the country back since the PNI was launched.

Some argue that Bancomext, Mexico’s Development Bank, has the potential to act in some ways as a P3 agency for the country. With an office to oversee all P3 projects in the country, it could also establish a registration window providing an entry point for firms and organizations, both locally and internationally.

Such a move could restart this market, but it will likely be the next presidential term before Mexico takes the next leap in its development.

This page was last updated on:
21 April 2017.

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