Hidalgo's improving conditions for investment attract attention

Named after one of the initiators of Mexico’s War of Independence, Miguel Hidalgo y Costilla, the state authorities have been working to enhance Hidalgo’s position through more effective inter-dependance with the country’s capital, based on the state’s proximity, logistics capabilities and ongoing developments in key industrial sectors.

With a rich mining history, an unrivalled location both for exporters and companies serving the domestic market, and escaping relatively unscathed from the drug-trafficking violence that afflicts other parts of Mexico, Hidalgo has the tools to flourish, despite being one of the less developed states in the country. Indeed, the state has become an increasingly prominent destination on investors’ radars and was shortlisted as the location for several potential flagship projects – including Mexico City’s new airport and a BMW manufacturing plant. Though these ultimately settled for other locations, the state’s bids served to put it on the map for investors.

Hidalgo also submitted one of the 238 bids from across North America to host online retailing giant Amazon’s second headquarters in 2017, though none of the three Mexican states to throw their hats in the ring were shortlisted. Undeterred, Hidalgo’s current government has looked to accelerate efforts to attract investment since taking office, launching a package of reforms designed to ensure that being next door to one of the world’s largest consumer markets is an asset for the state and its people.

Investment

These efforts have been paying off, with private investment under the new administration hitting record levels. In November 2017, just 14 months after the governor of Hidalgo, Omar Fayad Meneses, assumed office, Grupo Modelo – the Mexican arm of the world’s largest beer maker, AB InBev – announced it would invest MXN14bn ($756.6m) in a brewing and bottling plant in the southern part of the state. This represents the largest private investment ever to be made in Hidalgo, and – alongside several other local and international arrivals – means investment is entering the state at an unprecedented rate.

Geography & Climate

With a territory of 20,905 sq km, Hidalgo is the 26th largest of the country’s 32 federal entities, and accounts for 1.1% of Mexico’s total landmass. Located in the central-eastern part of the country, Pachuca, the state’s capital city, is just 90 km from the country’s capital Mexico City.

Hidalgo is home to the most elevated village in Mexico, Real del Monte, which sits 2718 metres above sea level; the state’s highest point is Cerro La Peñuela at 3350 metres. Near the north-eastern tip of the state is San Felipe Orizatlán, its lowest municipality, at just 175 metres above sea level.

Located in the Huasteca region, the state shares borders with six others. To the north is the state of San Luis Potosí. To the north-east is the coastal state of Veracruz, while to the south-east is Puebla. Southern Hidalgo borders the states of Tlaxcala and Mexico, while the industrial powerhouse of Querétaro lies to the west. Hidalgo’s climate is generally mild, with an average temperature of 16°C and average annual rainfall of 800 mm.

Pre-colonial Importance

Hidalgo’s mild, benign climate means that the region has attracted human settlements since long before colonial times. Indeed, the oldest artefact to have been discovered in the state is an axe dating back to 11,000 BCE.

The archaeological site at Tula, the city in the west of the state where Petróleos Mexicanos now has a refinery, exists as a reminder of a time when it was the most important city in the region after the fall of Teotihuacán beginning in the 6th century.

Mining Discoveries

Yet it was shortly after the arrival of the Spanish colonists in the early 16th century that Hidalgo discovered an economic vocation that would last for four centuries. In 1552 the first mines were discovered in the vicinity of today’s state capital Pachuca and the nearby village of Real del Monte, following the earlier appearance of the Plomo Pobre mines near Ixmiquilpan.

Hidalgo’s importance as a mining centre was established early on when Pachuca-based Spanish merchant Bartolomé de Medina discovered the patio process for extracting silver from ore using mercury amalgamation in 1554. It was a notable advance in mining that was to be used across the world for 300 years. But fortunes were inconsistent for the mining industry. In the 1720s the mines in Pachuca and Real del Monte were flooded and remained largely out of use until being drained and operations restarted 20 years later, bringing about another mining boom that produced more than 7m pesos of pure silver, according to historical records produced by the state.

Cornish Flavour

The Mexican War of Independence, between 1810 and 1821, left the mines of Pachuca and Real del Monte in ruin and flooded yet again, with more than half abandoned and those that remained in use operating at just 10% of capacity. The Mexican government, realising the importance of mining as a key source of jobs and tax revenues, intervened to reactivate the sector by seeking and facilitating foreign investment.

The tercer conde (third count), who owned most of the mines of Pachuca and Real del Monte, found a group of English investors – brought together in a company called the Compañía de Caballeros Aventureros (Gentlemen Adventurers’ Company) – and began recruiting miners from Cornwall. The UK’s most south-western county, Cornwall was known for having the most skilful miners in the world.

Some 130 Cornish miners set sail on the first boat from England – though many died before completing the arduous journey to Mexico – bringing new technologies such as the steam engine to drain the mines.

Thus began Hidalgo’s unlikely historical connection with Cornwall – one that endures today in the local gastronomic specialty: pastes, pronounced pasties, which look (and taste, in their traditional form) exactly like the famous Cornish Pasty.

English miners also left an indelible mark on Pachuca and Real del Monte with the construction of traditional Cornish mine houses and by bringing football to Mexico for the first time. Indeed, Pachuca is the oldest football club in the country. However, the English ownership of the mines was a more passing influence. The Gentlemen Adventurers’ Company sold up in 1849, having failed to make enough money to justify their investment, though many of the English stayed to work the mines that began to flourish again under an independent Mexico.

Founding the State

What is today Hidalgo had been part of the old Estado de México since the first Mexican Constitution of 1824. When this entity was deemed to be too large to manage, President Benito Juárez created the state of Hidalgo in January 1869, with Pachuca as state capital.

By this time, Pachuca had begun to experience rapid growth. In 1851 the discovery of the Rosario mine brought the largest mining boom yet to the region, and Pachuca’s population increased from 4000 in 1850 to 15,000 in 1869.

Industry in Apan

Alongside mining, other industries were also developing around the time Hidalgo was established as a state. In particular, the production of pulque – an alcoholic drink made from the agave plant – was reaching new heights. In the same southern Apan region where 150 years later Grupo Modelo would build its brewery, pulque producers were already reaping the benefits of Hidalgo’s proximity to the large consumer market of Mexico City.

This boom brought developments including, in 1866, the opening of the railway line between Apan and Mexico City as part of the line running from Mexico City to Veracruz. By 1899 there were 374 km of railway lines in Hidalgo operated by five companies.

The arrival of the railway was accompanied in the latter part of the 19th century by other technologies, such as the telegraph and telephone. Indeed, investment in the mining and pulque sectors brought a range of advances in other sectors. It was thanks to the mining industry, for example, that Hidalgo was one of the first places in Mexico to have energy produced by the private sector.

The Economy Today

Despite its colourful economic history, Hidalgo’s key economic indicators show there is significant room for growth and development. Representing some 2.4% of the population, the state contributed 1.6% to national GDP in 2016.

State efforts to improve the business environment in the state are crucial to enhancing the lives of residents. The proportion of Hidalgo’s workforce in formal employment has been lower than the national average over the last decade. As of the end the fourth quarter of 2017, the labour informality rate hit 75%, the fourth-highest level across the country, according to data from the National Institute of Statistics and Geography (Instituto Nacional de Estadística, Geografía e Informática, INEGI).The national average was 57%. Recent investment in the state has begun to reverse this trend, with formal jobs hitting a record high in April 2018 and wages rising as higher-skilled positions open up (see analysis).

Politics

Given its current standing and potential for growth, economic development has been a key priority for the state government over its six-year term, which is due to end in 2022. Governor Fayad, a former mayor of Pachuca, is a member of the Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI). He came to the state house as part of a coalition with the PRI, the Ecologist Green Party of Mexico and the New Alliance Party.

At his inauguration, the governor promised a hard line against corruption and vowed to make attracting investment from both Mexico and abroad a priority for Hidalgo. Fayad placed José Luis Romo Cruz at the helm of the state’s economy. The Harvard-educated economist is in charge of attracting investment in his role as secretary of economic development.

Public Finances

The state’s economic management has garnered attention. International credit ratings agency Standard & Poor’s (S&P) raised Hidalgo’s credit rating from “mxA-” to “mxA” in May 2017 with a stable outlook – a rating it retained in May 2018 – putting it in line with the state of Chiapas and above Oaxaca (“mxA-”), but still below important industrial states such as Aguascalientes, Querétaro, and Guanajuato (all of which are rated “mxAA+”). In making the upgrade S&P said that the state had shown a “consistent improvement” in its budgetary performance and that it expected the authorities to maintain a disciplined fiscal policy over its term. S&P also said it expected Hidalgo to continue to reduce its debt. According to the state government’s firstyear evaluation, public debt had fallen to 1.8% as of September 2017, down from 2.5% a year earlier. Moody’s affirmed Hidalgo’s “A2.mx” credit rating in January 2018, highlighting the expected long-term growth in the state’s payroll tax collection from new investments such as Grupo Modelo’s brewery. At the same time, however, Moody’s also cited ongoing challenges for the state, including “low own-source revenues and modest liquidity levels”.

In an interview with OBG, Fayad credited the upgrade to his administration’s efforts to rebalance the budget away from recurrent spending. This included making efficiency savings by streamlining public offices that duplicated functions or complicated the business environment with unnecessary procedures and reorganising the staffing structures. “What we want is greater growth in investment spending, rather than current spending,” Fayad said.

Connectivity

Attracting investment will be facilitated by the state’s strong transport links. The Arco Norte (Northern Arc) motorway, which began operations in two phases in 2009 and 2011, marked the most recent addition to Hidalgo’s existing connections to the rest of the country.

Acting as a bypass around Mexico City, the 223-km toll road passes through the southern part of Hidalgo, effectively connecting the state to Mexico’s central region. This also puts Hidalgo on the route between Mexico’s eastern Gulf ports and the Pacific.

Already in Hidalgo’s favour were its proximity to the Pacific ports, and the so-called Nafta Highway, or Carretera 57, which leads to the US.

Lastly, Hidalgo has the only intermodal logistics terminal where both cargo rail networks – Kansas City Southern de México and Ferromex – connect with road links that criss-cross the country. The terminal is a joint venture between local conglomerate Grupo UNNE and global giant Hutchison Ports.

In terms of public transport, within Pachuca, the Tuzobús integrated bus rapid transit system comprises 134 vehicles travelling across 18.5 km of routes. City dwellers make around 130,000 journeys a day on the network. Hidalgo also maintains a higher number of vehicles per person than the national average, at 2.9, versus a country-wide level of 2.3.

A Piece of Peace

In addition to being well connected, Hidalgo ranks as the sixth most-peaceful state in Mexico, after Yucatan, Tlaxcala, Campeche, Coahuila and Chiapas, according to the 2018 Mexico Peace Index by the Institute for Economics and Peace, a global think-tank. The index combines measures such as the murder rate, violent crime, firearm crime, organised crime and the number of unconvicted prisoners to produce an overall score. Hidalgo fares better than the national average in all five categories. Furthermore, at 5.1 per 100,000 residents in 2016, Hidalgo’s murder rate was lower than the 5.4 registered in the US, according to FBI data.

Hidalgo is also renowned as a peaceful state in terms of the labour market. There has not been a local or federal strike in the state for over 15 years.

Demographics

Hidalgo’s population of 2.96m is made up of 47.8% men and 52.2% women, according to the latest INEGI data from the fourth quarter of 2017. Among those aged 15 or under, just over half (51.9%) are male. However, of the 2.13m residents of a working age, slightly less are men, at 46.1%.

Some 50.6% of Hidalgo’s population were classified as living in poverty in 2016, according to the National Council of the Evaluation of Social Development Policy. While this represents an improvement on the 54.7% registered in 2010, it remains above the national average of 43.6%, and is the ninth-highest rate in the country. GDP per capita was $5095 in 2016, according to the most recent figures from S&P, against $8800 for Mexico as a whole. The UN placed Hidalgo in 24th position among Mexico states in its most recent human development index from 2012.

According to the most recent INEGI data from March 2015, the population is well spread across the state, with only 277,375 people living in the capital and largest urban area, Pachuca. Tulancingo de Bravo is the second-largest city in the state, with a population numbering 161,069. Hidalgo is home to a significant number of indigenous Mexicans. According to INEGI, in 2015 nearly 15% of Hidalgo’s population spoke some kind of indigenous language, of whom 10% did not also speak Spanish.

Education & Research

Rapid growth in educational institutions over the past two decades has increased the number of people ages 19-25 who are in or have completed higher education from 5% in 1995 to 33% in 2015. This growth at the tertiary level suggests a much-needed shift in access is beginning, though there is still significant work to do. The average time spent in education for those aged 15 and over stands at just eight years, according to a 2016 diagnosis from the state Secretariat of Education.

Some of the issue is a generational one: of the 35.5% of those aged 15 and over who have an educational lag – either not having completed school or being unable to read and write – half are 50 or older. Figures are thus likely to improve as today’s students become tomorrow’s graduates. According to the secretariat, all of Hidalgo’s primary schoolaged children are enrolled in education.

City of Knowledge

The government has big plans for the education sector, both in terms of ensuring the population is well prepared for an expected swathe of new investments, and by placing innovation at the centre of its economic agenda. Some 39% of homes in Hidalgo have internet connections – against the national average of 47%.However there are around 2.6m of internet users in the state, approximately 90% of the population.

Pachuca City of Knowledge and Culture, a vast 175.6-ha plot of land less than a 20-minute drive from the historical centre of the state capital, is a testament to the administration’s vision of turning the state into a centre of innovation for industry.

What today is mostly empty land will become a smart city occupied by technology companies, research centres and academic institutions, alongside the residential and commercial facilities required in a complex that will house some 25,000 people.

Time for a Turnaround

The clearest evidence that fortunes may be on the up for Hidalgo is now found in the private investment in the state since Fayad became governor in the third quarter of 2016. Between the new administration taking office and March 2018, some MXN27.3bn ($1.5bn) of investment arrived in the state. By comparison, inflows received during the first two years of the previous administration, which was in office in 2011-16 totalled MXN5.96bn ($322.1m).

Outlook

With plenty more investment in the pipeline, the task now facing Hidalgo’s government is to ensure that the benefits are felt across the state’s broader economy and remain localised. “We want the pesos that come to Hidalgo to stay in Hidalgo,” Romo told OBG. “If we do not create an ecosystem whereby the new investments are linked to local companies, we will end up with isolated investments that have no multiplier effect.” Developing that ecosystem will involve using natural and administrative advantages.