Private time: Public-private partnerships will play a key role in making up for gaps in infrastructure funding

Since its inception in 2012, Mexico’s public-private partnership (PPP) law has opened the door to private capital assuming a larger role in the development of the country’s infrastructure. Use of this option is becoming increasingly critical, with the federal government experiencing a reduction in its budgetary capacity to invest in large-scale public works projects. This has led to a call from Mexican authorities to increase the number of PPP agreements to achieve the goals set by the National Infrastructure Programme 2014-18.

While successive governments have committed large amounts of public funds to infrastructure development, the current strain on public resources is changing the mindset regarding infrastructure in Mexico. Speaking at a public event in early 2015, Francisco González Ortiz Mena, managing trustee of the National Infrastructure Fund (Fondo Nacional de Infraestructura, FONADIN), stated that the country should move decisively away from the belief that infrastructure development should be led by state-financed public works and increase the cooperation between public and private financing schemes. The current National Infrastructure Programme for 2014-18 calls for the private sector to contribute up to 37% of total investment needs; however, Mexico’s reduced oil revenues may encourage the government to seek even greater financial commitment from the private sector.

A New Law

A better balance between private and public investment in infrastructure became more feasible after the passing of a new PPP law in early 2012. The law introduced several key elements that authorities hope will positively impact investment flows into the infrastructure sector. The regulation more clearly establishes the obligations and rights of state and private partners in PPP agreements. Common contracting rules were unified, meaning that private operators can now expect to establish a contract that is based on overall market standards, and be liberated from having to adapt to local procurement rules or other state-specific laws. Land acquisition also becomes easier under the new regulations, allowing for greater flexibility to adapt contracts after construction has started. Furthermore, the regulation is to strengthen investment security by allowing for international or national arbitration of disputes.

Perhaps most significantly, the law encourages private entities to present unsolicited bids for infrastructure projects on their own initiative. This has several advantages. It allows for project design and structuring to be handled by the private sector, as opposed to having to wait on public tendering, mitigating losses of time that occurred in the past after ill-planning led to the cancellation of project tenders. Also, it means that the financial rationale behind new infrastructure projects is more likely to be thought out pre-emptively.

PPP deals to establish large-scale infrastructure typically involve a government subsidy or financial contribution. Within the current framework, PPP deals can be of three different types: a pure concession deal, in which the government supports the construction project; a combined PPP deal, in which the project is supported through a combination of government funds and private funds; or a self-sustained PPP, in which the project cost is paid for by the private partner, with a use of funds generated by the infrastructure projects.

Learning From Experience

Recent history made a strong case for the reform of the PPP law in 2012. In the late 1990s, the Mexican state bailed out a total of 20 toll road projects that had been established with a combination of public and private financing.

While this can be partly put down to a negative macro-economic environment, poor planning was also a factor in some public-private concession deals, with short concession periods of 15 years and poor estimation of traffic flows, according to a 2014 report on Mexican PPPs by consultancy firm White & Case. Although the regulation covering the structuring of public-private partnerships for infrastructure projects has evolved since, the strengthening of the framework under the current PPP law was designed to greatly reduce risk for both government and private operators.

Potential

Projects scheduled in the transport sector during the current term will test the effectiveness of the new PPP law immediately. According to the Ministry of Transport and Communications (Secretaría de Comunicaciones y Transportes, SCT), transport sector projects will mobilise MXN582bn ($39.17bn) between 2013 and 2018. Road development projects will get the biggest share of investment, with an estimated MXN386.2bn ($25.99bn). Expansion of railroads and mass transit systems will receive MXN98.1bn ($6.6bn), followed by port infrastructure at MXN62.4bn ($4.2bn) and airports at MXN35bn ($2.36bn), although this figure excludes Mexico City’s new international airport.

Roads Ahead

Road network developments in the coming years will provide the opportunity to test the country’s recently established partnership laws, with several projects being awarded through PPP concession contracts. In June 2014, transport authorities awarded the $269m project to build 129 km of the Cardel to Poza Rica highway linking Laguna Verde to Guttiérez Zamora, on the coastal region of Veracruz, to a consortium led by Portuguese Construction firm Mota Engil. The concession contract extends for 30 years, and the consortium will be responsible for building and operating the stretch of road.

The first highway project to be developed under the PPP law’s unsolicited bids provision is the Tuxpan to Tampico road connection, linking two important seaports on the Gulf Coast. The $475m project is being developed by a consortium led by Mota Engil. Mexican authorities gave the green light to the project in late 2014, and the consortium will build a 107-km section of the total 159 km and be required to maintain and operate it for a 30-year period. Several road projects have used the combined PPP model. The contract for the Tuxpan to Tampico highway project, for example, involves a government subsidy of MXN1.3bn ($87.49m). Another recently awarded highway construction contract, for the Cardel to Poza Rica highway, also involves a government subsidy, set at MXN827m ($55.66m).

Prospects

With Latin American countries such as Peru and Colombia also offering investors engaging in concession deals some degree of financial backing, competition to attract the best private partners for infrastructure construction is tighter than ever. Mexico’s competitiveness will rely on maintaining a consistent regulatory framework that reduces risk, and governmental financial support for some types of infrastructure concession agreements.

The country has put a big emphasis on the improvement of its transport infrastructure. While achieving this through a strong public investment role has become harder under the current fiscal constraints, if the PPP law can mitigate some of the risks that have plagued past concession deals, and serve up the right incentives for private participation, authorities will have a very good opportunity to secure the right amount of private investment for its infrastructure revamp goals.