Mexico transport infrastructure development continues

The expansion of manufacturing is both benefitting the Mexican transport sector and placing it under increased pressure. Growth in sub-sectors such as automotive and aerospace industries is positively impacting transportation services through roads, railways, airports and the country’s network of both Pacific and Atlantic seaports, while at the same time, extra passengers and cargo are placing increased pressure on transport networks. Against this background, the current administration introduced a wide-ranging national infrastructure programme for 2014-18, allocating MXN582bn ($39.2bn) for the improvement of transportation links.

Since Mexico launched its national infrastructure programme, the macro-economic environment for public investment has changed. Declining oil prices since mid-2014 have negatively impacted the country’s budgetary position, leading the government to cut expenditure. In early 2015 Minister of Finance Luis Videgaray Caso announced a 2.6% cut in the national budget for the year, which was reduced by MXN124.3bn ($8.4bn).

However, other than some projects in the railway sector, no major cuts to large-scale transport infrastructure have taken place. Nonetheless, the current fiscal context may well lead to delays in project execution and will require the government to use the country’s evolving public-private partnership (PPP) model to seek out increased private sector participation.

Ranking

Maintaining investment will be a strategic necessity. Mexico’s transport sector accounted for 6.4% of the country’s GDP and 5.3% of national employment in 2014, according to a report by the Mexican Chamber for the Construction Industry. The size and geographic diversity of the country, coupled with the expansion of strategic sectors, have made it a challenge for successive governments to revamp Mexico’s infrastructure.

The World Economic Forum’s (WEF) “Global Competitiveness Report 2014-15” ranks Mexico 69th out of 144 countries in terms of the overall quality of its infrastructure, indicating a loss of competitiveness in comparison to the 2013-14 report, in which Mexico ranked 64th. Of the different transport modes analysed by the WEF report, the only one that experienced an improvement in competitiveness was the air transport segment, which climbed one place to 63rd.

Because of the size of the country, the quality of infrastructure affects transport costs, which in turn affect businesses’ ability to expand and operate internationally. According to the World Bank’s 2015 “Doing Business” report, the cost of exporting a container from Mexico City is $1450, higher than the regional average of $1299 or the OECD average of $1080 per container. The higher costs might be partly related to the fact that Mexico City, the country’s centre of economic activity, is located inland and not on the coast. Mexico fares comparatively better in terms of the average time needed to export a container: 11 days, according to 2014 estimates. This time compares well to the OECD average of 10.5 days per container, and is significantly better than the regional average of 16.8 days.

Besides revamping physical infrastructure, process improvement on the part of the Mexican Customs authority (Aduanas de México) has helped streamline import and export procedures. “Aduanas de México have reached a point where all Customs processes are automated; only 10% of incoming products are physically reviewed. Besides certain industries, such as textiles, where importing is more complex, importers do not have any Customs issues. When companies do have Customs issues it is not because of Aduanas de Mé xico, but because importers don’t have the necessary paperwork in order for processes to flow efficiently,” José Guzmán Montalvo, president of Global Customs and Business Solutions, told OBG.

PPP

Sector stakeholders believe improving infrastructure will depend on the government’s ability to attract private investor interest in the updated National Infrastructure Programme 2014-18, making up for a lower capacity to commit public funds. “The government has announced cuts, and this could endanger the full completion of the infrastructure programme. The most active sector thus far has been the road sector, because it depends heavily on concessions and private capital,” Francisco Ibáñez Cortina, lead partner for capital financing and infrastructure projects at PwC México, told OBG. Agustin Picado, managing director of UPS Mexico, also told OBG, “Port, train, airport and highway infrastructure in Mexico has improved in the last decade, as has the flow of goods in and out of the country. However, additional infrastructure investments are needed to improve the attractiveness of Mexico for FDI. In particular, investments in the area of customs processes would reduce lag time and improve the reliability of importing raw material and exporting finished goods.”

Road

Road transport remains a strategically vital component of Mexico’s economy. Accounting for 57% of freight transport in the country, it relies on a network of 370,000 km of roads that link the country from north to south and between its two oceanic coastlines. Some of the most important road connections link the capital with border crossings to the US. A key road takes freight from Mexico City to Nuevo Laredo, linking with the state of Texas. Also heading north is the connection between the capital and Nogales, which links to Arizona. Routes to the larger commercial ports are helping to grow intermodal transport, such as the highway between Mexico City and the port of Veracruz, or the link from Guadalajara to the port of Manzanillo.

The Ministry of Communications and Transportation (Secretaría de Comunicaciones y Transportes, SCT) has announced that for 2015 alone, the government will spend $3.5bn on highway projects. The 2012 PPP law will be essential for new road development, as the state aims to attract private investment to overhaul transport infrastructure (see analysis). Part of the current road plans will expand on existing links, further integrating the road networks with port facilities. Despite its key role, the Mexican road transport sector remains highly fragmented, with 82% of registered trucking companies managing small fleets of between one and five vehicles, according to figures from Mexico’s National Chamber for Road Freight.

Furthermore, national transporters are increasingly concerned about the impact that insecurity is having on business. According to the Mexican Association of Transporters’ Organisations (Asociación Mexicana de Organizaciones de Transportistas, Amotac), the sector loses up to 50 vehicles per month due to criminality. Quoted in local media, Amotac officials stated that as of late May 2015, sector losses for the year had reached MEX250m ($16.8m). Roads in the states of Michoacán, Veracruz and Guerrero have been especially vulnerable to criminal activity. Although road insecurity and the associated cost in lost cargo and insurance provisions are likely to continue to be a reality in the transport sector for the foreseeable future, federal authorities have increased security in more troubled states, and Amotac and other transport associations are introducing security precautions, such as bans on overnight trips.

Air

The country’s vast land mass has also encouraged the development of its air transport sector, and a total of 85 airport facilities dot the country. Privatisation of airport operations started in the late 1990s, and 34 facilities are managed by concession-holders, allowing for a revamp of key airports. Additionally, the governmentowned Airports and Auxiliary Services, which also operates several fuel depots across the country, manages or partly operates 26 airports, while 27 other airport facilities are operated by the Ministry of Defence, the navy and municipal authorities.

Fuelled by tourism, business and growing domestic demand, passenger numbers have risen steadily. In 2014 a total of 65m passengers went through the country’s airports, according to figures by the SCT, an 8.5% increase on 2013 figures. Of these, 61.6% of passengers were transported by domestic airlines, with the remaining 38.4% handled by foreign airlines. With an annual average increase of 4.5% in the number of passengers between 1991 and 2014, Mexico’s air sector has become increasingly competitive.

Furthermore, passenger figures are expected to continue to climb steadily. “The private airline industry is not tied to one specific sector. Even though we cannot measure the impact the energy or telecommunications reforms could have on our sector, we are confident the flow of investment will lead to marked growth,” Alexis Javkin, managing director of MexJet at Aerolíneas Ejecutivas, told OBG. Air links with the US remain key, with passengers coming from US cities accounting for over 22.5m visitors in 2014, compared to 2.6m passengers originating from Europe.

Though airports were only scheduled to receive about 6% of the total investment in the transport sector under the National Infrastructure Programme 2014-18, these estimates did not include the new international airport scheduled to be built in Mexico City over the coming years. The project is expected to cost $9.2bn and start operations by 2018. In its initial stage, the airport will be serviced by four runways and have the capacity to handle 30m passengers a year, a figure which the SCT says will double to 60m by 2060. “The Mexico City Airport is ideally positioned as the entrance to Latin America. If the new airport develops smooth connections, it will have the potential to become a hub in the region, just as Panama has been able to do,” Eric Caron, managing director at Air France, told OBG.

Railway

Long managed by the state, authorities started to privatise the Mexican railway system in 1995, dividing the country’s railways into different regions and putting them under private management through concession deals lasting up to 50 years. Railway lines now carry 28% of all freight moving inside Mexico, with import and export movements accounting for 50% of all railway cargo. Railways have become pivotal for the growth of manufacturing activities, especially in northern Mexico, with easy links to the US and Canada.

Most of the 26,727-kilometre system is managed under one of six different concessions. Ferromex, owned by conglomerate Grupo México, is the biggest railway concession in the country. Its network connects the north-western railway lines, linking northern cities to five border crossings into the US. It also allows for direct transportation of cargo to important ports such as Manzanillo and Mazatlán, on the Pacific coast, and Altamira, Tampico and Veracruz, on the Gulf of Mexico. Also under Grupo México’s control is the smaller Ferrosur concession, in charge of the south-eastern railway network. A joint-venture between US-based Kansas City Southern (KCS) and Mexican shipping group Transportación Marítima Mexicana (TMM) won the concession for Mexico’s northeast railway lines in 1996, with KCS buying out TMM in 2005 and becoming Kansas City Southern de México (KCSM).

A handful of smaller concessions manage smaller railway lines across the country. The Coahuila-Durango line is managed by Industrias Peñoles, and Viabilis is the concession-holder for the line that links Chiapas to Mayab. The three biggest railway concessions, Ferromex, Ferrosur and KSCM, also own Terminal y Ferrocarril del Valle de México, which operates railway links in and around the capital city. Mexican railway lines are owned by the government, which means that only the state can build new railway links.

Although initially leading to fears that concession-holders would have to share railway lines with other operators, legislative changes introduced to the railway sector in early 2015 have kept the existing concession framework, while introducing a sector agency to resolve disputes between customers and concession-holders. “There was a rectification of the figure of the concession-holder. It is important to have a regulatory agency that will listen to the different parts involved in the railway service,” Iker de Luísa Plazas, general director of the Mexican Railway Association, told OBG.

Under the current administration, new impetus has been given to passenger railway links, with several important projects announced. Some of these have since been cancelled or postponed under budgetary constraints. Already under construction is the high-speed train linking Mexico City to Toluca, a 57.7-km connection. The initial tender for the project, covering the construction of the first 36 km, has already been awarded. The railway is expected to cost MXN45bn ($3bn) and be operational by late 2017. The SCT expects the link to greatly reduce traffic between the two cities, which frequently reaches 18,000 vehicles a day.

A planned 250-km passenger link between the city of Mérida and the Mayan Riviera, on the Yucatán Peninsula, has been cancelled. The project was expected to cost MXN17.9bn ($1.2bn) and involve both public and private financing. Although over MXN500m ($33.6m) had been spent on the initial planning of the project, the SCT announced in late 2014 that the railway project would be cancelled due to budget cuts.

Uncertainty affected another large railway project. The tender process for the MXN59bn ($4bn) project was suspended only days after it had been awarded to a consortium led by the China Railway Construction Company, following allegations of unfair bidding. Shortly after the suspension, the SCT announced that the railway project would be re-tendered in the near future.

Urban Transport

Commuter accessibility is being improved by ongoing investment in Mexico City’s urban transport network. The continued expansion of the Metrobús system, which uses a network of environmentally friendly buses moving on exclusive lanes, has helped reduce traffic in the Mexican capital. Launched in 2006, it now has a network measuring 105 km across five different lines crossing the city.

The capital’s 195-station underground system plays an essential role transportation. With a total of 12 lines running for 226 km, Mexico City’s metro is one of the largest underground systems in the world. Plans are under way to extend four metro lines, a project which will entail total investment of MXN36bn ($2.4bn), according to SCT figures. Initial tenders for the metro line extensions are expected to be launched in 2015. Also under way is the construction of the third line of the Monterrey metro, a MXN5.7bn ($383.6m) project set to be completed by the end of 2015.

Ports

With a coastline opening both to the Atlantic and the Pacific oceans, Mexico’s geographical position has put it at the centre of global trade routes. Recent years have seen the country’s 117 ports visited by increasing quantities of international trade by sea. Total annual cargo handled in Mexican ports rose from 241m tonnes in 2009 to 289m tonnes in 2014, according to figures by the SCT. Over 40% of the cargo that came through the country’s port infrastructure in 2014 was hydrocarbons and associated products, followed by bulk mineral cargo at 26.7% and container traffic at 14.1%. Containerised traffic has been rising steadily, with over 5m twenty-foot equivalent units (TEUs) handled in 2014, compared to 4.2m TEUs in 2011.

Several port expansion projects started by the current administration are still ongoing, and transport authorities anticipate port handling capacity will double to reach 500m tonnes annually by 2018. This will entail a total investment of $6bn during the current presidential term, with the bulk of the investment going to the country’s 16 most important ports. According to 2014 figures from the SCT, Mexico’s eight biggest ports handled 68% of the traffic. The share of containerised traffic is even more densely concentrated, with Lázaro Cardenas, Manzanillo, Veracruz and Altamira accounting for 95% of containerised traffic.

The port of Manzanillo remains the most important commercial port, handling 10% of total cargo in 2014. Operated by Contecon since 2013, the port is currently undergoing modernisation, with a view to enhancing capacity to align with expansion taking place on the Panama Canal. A multipurpose terminal is scheduled for completion during 2015, and besides the expansion of its container-handling terminal (expected to handle up to 4m TEUs annually), the plan also envisions a MXN1bn ($67.3m) mineral-handling dock. Further works are ongoing to improve Manzanillo’s intermodal capacity, and port authorities hope that 40% of the cargo coming in and out of the port will use the railway network.

In all, private and public investment at the Port of Manzanillo is expected to reach $5.7bn by 2020. The port has been successful at attracting private investment, with 14 private terminals servicing companies such as cement producers Cemex and Apasco.

In mid-2014 another important expansion project was finalised at the Lázaro Cardenas port in the state of Michoacán, with a $1.8bn investment to expand capacity on the port’s Container Terminal One and build the first stage of the port’s second container handling area.

On the Gulf Coast, the first phase of the expansion of Veracruz port began in November 2014 and is expected to be completed by 2018, with an estimated cost of up to MXN27bn ($1.8bn). Work will focus on the construction of a quay and a reef protection system. It will also allow for the dredging of the port to a depth of 16 feet. A further MXN8.8bn ($592.2m) is expected to come from tendering private terminals. The tender of a new privately operated container terminal is expected to be launched by end-2015. The full project is predicted to run up to 2025 and cost MXN60bn ($4bn), with Mexican port authorities expecting Veracruz to eventually become a majoLatin American port.

Logistics

To properly consolidate large-scale investments taking place in the areas of sea, land and air transport, Mexican authorities are aiming to improve logistics operations in the country. Picado told OBG, “There are many sectors that offer unique opportunities for logistics companies in Mexico, including automotive, high-tech and aerospace, among others. These industries are increasingly looking to optimize their transportation and supply chain networks while meeting specific time-in-transit, reliability and budget requirements. This opens a gateway of possibilities for innovative logistics providers to capitalise on market demand and offer solutions that streamline business growth.”

In 2013 the government unveiled a plan to launch a network of logistics areas across the country, each one with a specific focus. The National System for Logistics Platforms will be established from existing platforms as well as new facilities. The programme was developed by the SCT in conjunction with the Ministry of Economy, as well as the Inter-American Development Bank. Totalling 85 logistics platforms, the plan aims to create an integrated system in which the location of the logistics areas is decided by factors such as the proximity to production areas, regional markets, transport links, closeness to borders with neighbouring countries, and links to importing and exporting port facilities.

Outlook

With several industries positively impacting transport services, Mexico’s strong economic fundamentals will continue to feed the development of its transport sector. Infrastructure revamping remains a top priority for the government, and this has translated into a succession of improvements to roads, ports, airports and urban railway networks. These will all require heavy financial commitments over the coming years, and the lowering of revenues from hydrocarbons exports are likely to demand some form of budgetary restraint for the foreseeable future. Larger participation from the private sector will be called on to mitigate this lack of public resources. In the medium-term, Mexico has sizeable economic rewards to be gained if the government can manage to sustain the momentum it needs to complete its wide-ranging transport infrastructure plans.