Hidalgo working to make the most of its advantageous location

Centrally located and right next door to the large consumer market that is Mexico City, Hidalgo is ideally placed to benefit from its access to key markets across the country, as well as the ports that open access to markets around the world. National development preceded unevenly over recent decades, however, and the state has slipped into the shadow of its wealthier and more developed neighbours. To reverse this trend, the current authorities are working to shine a light on the natural and logistical advantages the state offers, while at the same time building a legislative environment that will attract new businesses and foster innovation.

Capital Constraint

Hidalgo’s proximity to Mexico’s capital city has for a long time meant the social and economic development that should come hand in hand with industry has leaked out of the state.

“Our closeness to Mexico City has had an important impact on Hidalgo because, historically, the benefits from industries that have been successful here in the state have either gone to Mexico City or outside the country,” Andrés Manning, director-general of the State Commission for the Development and Saving of Energy, told OBG. “Even as recently as 20 years ago, people in Hidalgo would go to Mexico City to go to the supermarket.”

Indeed, though the state’s closeness to Mexico City – the largest market in Latin America – is now being promoted as one of the state’s major advantages to potential investors, it has previously been a double-edged sword. “The state’s geographical position gives us advantages and disadvantages,” Noé Paredes, head of Grupo Corporativo UNNE, an industrial and logistics group, told OBG. “There is infrastructure that has not been developed here because Mexico City is close to Tula de Allende, where UNNE is based, and certain facilities within the capital are more accessible for hidalguenses than they are for many people in Mexico City itself.” However, according to Paredes, Hidalgo’s profile is growing rapidly, which should bring advantages to the state.

Back on the Map

Even before the wave of recent investments overseen by current governor, Omar Fayad Meneses, who took office in 2016, investors were already beginning to see Hidalgo’s potential.

There are a number of reasons for this increasing attention. First, the rapid growth of the Mexico City metropolitan area has naturally turned eyes towards Hidalgo as it is the only flat territory towards which the capital city can expand. Atitalaquia is a key destination in that regard, being well located to the north of Mexico City with lots of land to expand and good road connections making it a prime location for logistics companies serving the capital. Similarly, Tepeji, which is on the main motorway from Mexico City to the Bajío, and also passes through Queretaro, offers a less congested point for logistics companies.

Adding to this has been the gradual realisation by the state government of the importance of taking advantage of Hidalgo’s privileged position to propel economic growth. “The last four governors, including the current one, have agreed that there needs to be a joint effort to push the state forward,” Edgar Espínola, president of the Business Coordinating Council of Hidalgo (Consejo Coordinador Empresarial de Hidalgo, CCEH), told OBG.

Several previously promoted projects brought Hidalgo back onto the radar for large-scale investment projects. Tizayuca, in the west of the state, was proposed as the ideal location for Mexico City’s new airport, for example. It was only in September 2014 that then-President Enrique Peña Nieto confirmed the project would be in Texcoco, in Mexico State.

“In the end, the airport won’t happen here, but while it was on the table we did gain the Arco Norte (Northern Arc) motorway, and gradually the rest of the country began to understand that there’s a state with great potential here,” Espínola told OBG.

Hidalgo was also one of German car manufacturer BMW’s final two options for its Mexico plant. In 2014 BMW decided on the other location, but many in the state saw what could have been considered as another let down as an encouraging sign of progress.

“We didn’t win the BMW factory, but playing such a prominent role in the process has put Hidalgo in the eyes of investors,” Paredes told OBG. “The state fought to the end and that put us on a new stage.”

Wave of Investment

The Fayad administration has wasted no time in taking advantage of this platform, and private investments have arrived at an increased rate since he took office.

In 2016 there was just MXN160m ($8.6m) of private investment, according to Fayad. From the beginning of his term through to March 16, 2018, this figure reached MXN27.3bn ($1.5bn), according to data from the Secretariat of Economic Development ( Secretaría de Desarrollo Económico, SEDECO). On top of that, the government estimates some MXN56bn ($3bn) of potential investment that could arrive from parties that have already expressed interest.

In November 2017 came the long-awaited, largescale, flagship project that enabled Hidalgo to catapult itself to the headlines. Grupo Modelo – the Mexican arm of the world’s largest beer maker, AB InBev – announced it would build one of the largest breweries in the world in the southern hidalguense municipality of Apan. SEDECO estimates that Grupo Modelo’s MXN14bn ($756.6m) investment will create 16,700 jobs, directly and indirectly, and is the largest private investment in the state.

Although measures of private investment on a state-by-state basis are not available, based on the Ministry of Economy’s overall figures, Hidalgo’s secretary for economic development, José Luis Romo Cruz, estimates that Hidalgo was in the top-five states for private investment in 2017. Through March 2018, 22 major investments have been announced.

Strategically Targeted

Although certain private sector players have been spotting positive signs for several years, SEDECO’s own diagnosis of the state’s economic panorama when the new administration took office was “not very encouraging”.

The introduction to SEDECO’s 2017-22 development plan highlighted a “complex commercial and financial context” due to “global uncertainty”. It adds that higher fuel prices, a weaker exchange rate and a reduced federal budget are complicating the outlook for the Mexican economy. Lastly, it said that Hidalgo’s economy was “held back” and therefore “weak”.

If taking advantage of Hidalgo’s proximity to Mexico City is a central part of the plan to turn it into a thriving satellite economy, the state’s ambitions go beyond just becoming a factory for the neighbouring capital. Recent investment announcements suggest that Hidalgo is on the way to economic revival, but it is important to note that there is a clear strategy behind the government’s efforts to attract private investment. It is not a case of “seeking investment for the sake of seeking it”, Romo told OBG. SEDECO’s aim, as detailed in the 2017-22 plan, is to create not just more jobs, but also better jobs and to improve the quality of life of hidalguense families.

Investing in People

“If we do not close the salary gap it will be very difficult to stop the leakage of our human capital,” Romo told OBG. “At the moment we are investing in the state’s health, education and security, but people are going to work elsewhere.”

This gap is critical. A government presentation in January 2018 put the average monthly salary in the state at MXN8640 ($467) – a third of that in Mexico City (MXN25,553, $1381) and 30% less than northern neighbour Querétaro, where the average salary is MXN11,334 ($612) per month. However, early progress is encouraging. In the first five months of 2018, 9908 new jobs were created in the formal sector, bringing Hidalgo’s formal workforce to a record level, according to the Mexican Social Security Institute. Furthermore, wages to formal sector workers rose 4% in relation to 2017, bringing the average to MXN9203 ($497) as of February 2018.

Specifically, SEDECO is targeting four strategic sectors that it believes would bring in jobs with earning potential three times the average in Hidalgo. These are: energy; sustainable mobility; agro-industry; and the pharmaceuticals industry. These sectors were selected because there is already a precedent for them, with Hidalgo boasting suitable infrastructure to host the industries, in addition to them having strong growth potential and added value.

One-stop Shop

The government’s first step towards enabling these investments was to create what it calls the ventanilla única – or single window. The official government plan outlines the benefits of putting all state procedures and services in one accessible place, as it allows citizens and businesses to carry out transactions quickly and simply. By streamlining the state’s bureaucratic services, some stakeholders credit the window with turning around the environment for doing business in Hidalgo. “The single window for businesses is literally the fourth floor of the governor’s office,” Paredes of Grupo UNNE, told OBG. “This makes us all work more efficiently, and we all know that when we have an important requirement, the doors are open and we’ll receive a quick answer.” He added that the development is a clear example of the government taking actions, not just talking about what it wants to do.

Indeed, when Mexican construction company Grupo Gicsa announced a MXN1.95bn ($105.4m) investment in Pachuca in February 2017, its CEO, Elías Cababie, noted his approval of the investment process. Having a single window at which to attend to investors allowed Gicsa to “turn a project on paper into construction work,” he told local press.

Fayad is clear about the benefits he hopes the single window will bring investors. “This single coordination mechanism for establishing investments was probably the major achievement of our first year in government,” he told OBG. “Investors sometimes have to go through municipal, state and federal processes, which rather complicates things. We want them to be able to solve all these doubts in one place.

Regulatory Housekeeping

The single window comprises part of SEDECO’s first working area in the 2017-22 economic development plan: creating a good business environment. To start working towards this goal, the government had to “clean the house”, Romo told OBG. “Instead of doing what other states do and start offering fiscal incentives to investors, we decided to establish differentiating factors,” he said. “We began by making it easy to open and operate businesses so as to create an ecosystem of suppliers that would in turn help to attract big investments. This is what will allow us to take advantage of the potential that our strategic location grants us.”

Housekeeping began with a strong stand against corruption and passage of new legislation. In March 2017 Hidalgo’s Congress approved a new regulatory improvement law that is widely regarded as a potential model for federal use. In early 2018 the state’s economic development team was invited to the San Lázaro Legislative Palace in Mexico City to discuss the country’s national regulatory framework.

Recognising the gains enabled by the new law, the National Observatory of Regulatory Improvement (Observatorio Nacional de Mejora Regulatoria, ONMR) ranked Hidalgo as the state with the joint best regulatory policy in Mexico, alongside Nuevo León.

Article 41 of the new law states that its aim is to “incentivise economic development” using high-quality regulation to promote competitiveness via government efficiency and legal certainty, as well as by removing unnecessary barriers to commerce.

The thrust of this a reduction in the number of processes, response times, requirements and forms prospective businesses must complete, as well as an increased use of technological tools. These improvements have delighted many in the private sector. Espínola of the CCEH, which had been lobbying for a reduction in red tape and advised on the drafting of the law, says that the differences are already notable.

“In the past opening a business took 30 or 40 days, and it took 120 days to obtain a construction licence,” Espínola told OBG. “Now gaining permission for construction projects under 1500 sq metres can take just seven days, which is a significant improvement.”

According to the ONMR, Hidalgo is not quite as well positioned in terms of the quality of its institutions and the tools it has at its disposal – the other two categories it examines. But such is the strength of Hidalgo’s policy that the state still comes in seventh out of 32 in the ONMR’s overall classification.

Expert Opinions

Seeking to ensure that its new legislation means that Hidalgo’s regulatory environment really does constitute a differentiating factor, the state government has sought collaboration from international experts. Fayad signed an agreement with the OECD in June 2017, and continues to work with the organisation on regulatory improvements.

“We wanted to receive advice on the best international practices from the people with the greatest experience,” Fayad told OBG.

The CCEH was one of the organisations invited to discussions with the OECD, and Espínola told OBG the meetings highlighted how well drafted the new legislation is. “We even managed to get all the 84 municipal heads to agree to the new laws,” he said.

Beyond Manufacturing

SEDECO is now looking to build on the second leg of its development plan: “strengthening existing economic activity”, which in turn leads on to the third stage, which is to “encourage new local, national and foreign investments”.

The fourth part of SEDECO’s strategy provides a better idea of its focus: “to drive entrepreneurship, innovation, and the development of new strategic sectors”. This is the segment of the strategy that needs to be successful if the government is not only to bring in jobs, but create the level of jobs it wants.

“I’m not in favour of the maquiladora economic model,” Romo told OBG, referring to the Mexican assembly plants that are usually owned by US companies looking to take advantage of their southern neighbour’s cheaper labour and Customs advantages to assemble goods for the US market.

“This model is very popular, but we want to generate more value,” he added. “That’s why we want to create research and development clusters. We believe patents can emerge from Hidalgo.”

Therefore, the selection of energy, sustainable mobility, agro-industry and pharmaceuticals as strategic sectors may initially appear unusual for a state whose economic history revolves around mining, metals and textiles, but each one is designed to keep Hidalgo away from the maquiladora model. To further its aims to develop these knowledge-intensive sectors and create high-level jobs for the state’s residents, the authorities are establishing the Pachuca City of Knowledge and Culture on the outskirts of the state capital. This new city will provide a physical base for innovation to take off (see analysis).

Moulding the Law

Such ambitions, however, require the ability to compete with rival states. While Hidalgo’s location – close to major motorways, next door to the capital city and near to ports – is attractive, it has significant ground to make up to compete with other areas of the country, which have a longer history of economic growth and development.

A 2016 report by the Mexican Institute for Competitiveness, Hidalgo ranked 20th among the 32 federal entities. Based on data from 2014, the ranking represents an improvement of two spots from the previous iteration of the report from 2014, using data from 2012. The state government is well aware that the states that have experienced the most growth over the last two decades – Querétaro, Aguascalientes and Quintana Roo – top the list, and will be hoping that its efforts to improve the investment environment will be reflected in the upcoming report.

The authorities are aware that the state needs to catch up in order to keep up. Hidalgo’s average GDP growth of 2.8% over the last 20 years may put it roughly in line with the national average, but it is not enough for a state that has historically lagged to make up lost ground. With its business framework now among the best, the state authorities are now turning their attention to meeting challenges on the other fronts that potential investors examine, such as the availability and cost of their other infrastructure needs, including energy and transport networks.

To this end, 2018 began with the presentation of a second set of legislative reforms in Hidalgo to regulate new business arrangements such as special economic zones and public-private partnerships, as well as an energy development law and legislation creating a state energy agency. The latter three were published in the Official Hidalgo Gazette in April 2018, with the economic zone law awaiting approval.

The laws meet OECD standards, according to Romo. “I want to show foreign investors we have regulations of the quality they are accustomed to,” he told OBG. “This can be the state’s differentiating factor.”

Fair Competition

In this spirit of competition, Hidalgo is also looking to overcome the up-and-down relationship that Mexico is currently enduring with the US, and which the government flagged in its diagnosis of the economic panorama.

When it comes to seeking investment, the state is pursuing a diversification policy away from the US that has allowed the proportion of investment from its northern neighbour to drop from 80% in 2016 to just 8% in 2017. “We have sought to send a clear message to the US that our dealings are strictly business,” Romo told OBG.

For his part, Fayad said that there are “great niches of opportunity” away from the US which Hidalgo could begin to take advantage of, highlighting the Middle East, Europe, South America and Asia as increasingly important potential trade partners for the state ‘s businesses going forward. “We are particularly interested in making ourselves known to Asian markets,” Fayad told OBG.

Growing Optimism

With its well-defined strategy already starting to pay dividends in terms of legislative progress and rising investment levels, optimism is growing among private sector players.

“I think the government has understood that we businesses are the main creators of jobs, not the government,” Grupo UNNE’s Paredes told OBG. “They are doing this in a very coordinated fashion.”

Miguel Yáñez, the general manager of the Hidalgo Intermodal Logistics Terminal, a joint venture operated by Hutchison Ports and Grupo UNNE, told OBG he feels that Hidalgo is finally “finding its vocation”, both in terms of its economic growth strategy and in developing the tools with which to pursue it.

“With this strong economic development model, Hidalgo is discovering its strengths as an exporter,” Yáñez said. “We are very optimistic about the future.”