Mexico continues to break ground

Mexico continues to break ground 

There is no denying that Mexico’s reputation has taken some knocks in recent years. The country has been locked in a fierce battle with powerful drug cartels since launching an offensive in late 2006, and news headlines outside of the country have tended to focus on the negatives.

What is often overlooked, however, are Mexico’s many advantages and unique strengths. For one, the Mexican economy is fundamentally sound. At the center is a strong manufacturing base and the well-known maquiladoras which import raw materials and produce goods for domestic consumption and export. A strong industrial sector – especially automotive manufacturing and electronics – is complemented by large oil reserves and abundant silver, lead and zinc reserves.

According to The Global Competitiveness Report 2012-2013 published by the World Economic Forum, Mexico’s Gross Domestic Product (GDP) continues to outpace the rest of Latin America and the Caribbean region. Goldman Sachs has predicted that Mexico’s economy will be the world’s fifth-largest by 2050.

New century, new approach

The history of infrastructure in Mexico can be described as a patchwork quilt. Until the National Action Party (PAN) broke the Institutional Revolutionary Party’s (PRI’s) five-decade lock on power in the early 2000s, Mexico’s leadership invested most of its infrastructure efforts in just one area at a time.

In the early part of the 20th century, that meant railways. Subsequent governments invested in oil and gas, and then highways. That created an unbalanced and poorly integrated commercial and social backbone for the vast country.

Mexico’s 21st century approach to infrastructure – starting with the administration of President Vicente Fox from 2000-2006 – has been decidedly more holistic.

When President Fox came into power in 2000, the government began to approach infrastructure and development opportunities in a more integrated way. His administration launched an infrastructure program that would include every single sector. When the government saw the mountain Mexico had to climb after decades of a single-track method, they recognized the need to adopt a Public Private Partnership (PPP) approach to infrastructure development.

Fox’s successor, Felipe Calderón, continued the evolution. When he took office in 2007, the World Economic Forum ranked Mexico’s infrastructure 64th in the world. In the Latin America region, the country lagged behind Barbados, Chile, Panama, Jamaica, El Salvador and Uruguay. Infrastructure spending stood at just 3.2 percent of GDP, compared to Chile’s 5.8 percent.

Mexico’s National Infrastructure Plan was launched in 2007 – along with an emphatic statement by Calderón that, “Mexico cannot and should not fall behind.” Infrastructure spending rose to 5 percent of GDP during his administration and attracted significant private investment from home and abroad.

All told, some US$188 billion in planned investment was allocated to the 300-project plan – about 75 percent of which had been completed by the end of Calderón’s term. Projects ranged from rural road paving to construction of the Baluarte Bridge, the highest cable-stayed bridge in the world. About 21,000 kilometers of highways had been constructed by the end of 2012. One of the jewels in the crown – the US$1.6billion Durango-Mazatlán highway– will be completed in the summer of 2013, connecting the Gulf of Mexico with the Pacific Ocean.

The PRI returns to power

In December 2012, Enrique Peña Nieto regained the Mexican presidency for the PRI. The change in political leadership, however, does not foreshadow a change in Mexico’s infrastructure ambitions.

KPMG professionals have spent significant of time with people from the new administration and they clearly recognize that infrastructure must be one of Mexico’s top priorities if the country aspires to compete on the world stage.

One of the first orders of business for Peña’s administration was the January 2013 passage of an ambitious new PPP law. Previously, projects were governed by a fragmented series of laws and regulations, which often led to development delays and imperfect risk allocation models that unnerved potential investors. Mexico’s Finance and Public Credit Secretariat (SHCP) estimates that streamlining the development and tender processes under the new law will see projects kick off up to 6 months sooner than current averages.

One particularly interesting aspect of the new law is the provision for unsolicited proposals. Previously, government developed all infrastructure projects for tender, but now a private company can propose a project. To make things even more competitive, all unsolicited proposals will be publicly tendered. We expect this will foster a much more proactive private sector, while increasing competition and accelerating project timelines.

New administration, new opportunities

Recognizing that Mexico must continue to think about infrastructure holistically, the new administration is taking care to identify the full range of needs. We expect 60 percent of the investment during this administration will be made in the energy sector, which has been in recession for several years. We also anticipate significant investments in transportation, such as highways, railways, ports and airports; water treatment and desalination plants for human, agriculture and industrial uses; and social infrastructure and tourism.

In total, more than 1,100 projects are on tap, totaling some US$400 billion. Even at the current public investment rate of about 5 percent of GDP, that leaves a gap of about US$250 billion in funding that must come from the private sector.

That quarter-trillion dollars opens up a world of opportunity for domestic and international players.

We see a lot of opportunity for international engineering companies, contractors and operators, and we expect to see a truly global approach. Mexico is particularly looking to the UK because it was our early model for PPP schemes. Spain is showing interest because of our common language and culture. But to ensure projects are of the highest quality, we also anticipate participation from the French, Americans, Canadians, Portuguese, Brazilians and many others.

Make friends

For international companies casting an eye towards Mexico, we suggest collaborating with a local partner to help reduce the risk of working in a new country for the first time. Foreign firms can learn about the local market and how it works, and then build a larger presence with a local office or a subsidiary. Now that Mexico has a lot of experience with PPP schemes, there are plenty of local companies with good qualifications.

Mexico’s government is forging an ambitious path to economic prosperity. For international infrastructure players seeking a piece of that pie, the biggest challenge now is to provide the right credentials at the right price.

2013 is almost over

Eight months passed and there was still no clarity on the release date of the new National Infrastructure Program. That is, until 15 July when President Peña Nieto officially announced the launch of the Transport & Communications Investment Program 2013-2018, including US$130 billion of investment in this sector alone (see Table 1). Surely this marks the first indication that the National Infrastructure Program is coming.

Transport & Communications Investment Program 2013-2018

By Leonardo Estévez, KPMG in Mexico

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INSIGHT: Resilience

INSIGHT: Resilience
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