Linking the country: Infrastructure expansion is set to support economic growth

As new constitutional reforms start to take shape, Mexico is investing heavily in its transport and logistics infrastructure. Increased economic activity has put pressure on the current road and rail networks, and a bigger slice of the federal budget is therefore set to go towards improving connections by land, sea and air. Only months after his inauguration President Enrique Peña Nieto announced that public and private investments in the transport and communications sectors would reach MXN1.28trn ($99.45bn) between 2013 and 2018, and a total of MXN582bn ($45.22bn) will be used solely to enhance transport networks.

CONTINUED BUILD: The investment comes on the back of past efforts for the sector. During the last six-year term, the previous administration invested $69.2bn on transport and communications networks. However, the current investment policy is critical. With new reforms aiming to make the business environment more competitive, an influx of private investment is expected over the coming years. A liberalised hydrocarbons sector is set to attract more private operators into the country, underlining the need for a comprehensive transport infrastructure upgrade.

Much of the need for ongoing investment is also linked to persistent infrastructure deficiencies. According to the World Economic Forum’s 2013-14 “Global Competitiveness Report”, Mexico’s position has remained unchanged at 64th (out of 148 countries) between 2004 and 2013 in terms of the quality of its infrastructure. This means that, despite the work completed, there has been an inability to realise major progress on improvements to the country’s transport infrastructure. The same report ranks the road network at 51st, ports at 60th, the rail network at 62nd, and airports at 64th.

FACILITATION: To improve the quality of Mexico’s transport and logistics infrastructure, the current administration will need to not only invest heavily, but also ensure there is an improvement in the way different modes of transport interact. The government is hoping that a private-public partnership (PPP) law, published in early 2012, will help attract more private investment into transport infrastructure. Much of the proposed investment targets were launched via the Ministry of Communications and Transportation (Secretaría de Comunicaciones y Transportes, SCT). The Sectoral Programme for Transport and Communications says that most of the transport projects are designed to handle expected growth patterns for coming decades.

ROADS: Mexico’s economic performance is heavily linked to its road infrastructure, which accounted for between 54% and 57% of all cargo transported in the country between 2000 and 2012, according to the SCT. The existing infrastructure is made up of more than 377,000 km of road connections, and structured around 14 main transport corridors, crossing the country from north to south, as well as from the Pacific to the Atlantic coasts. Three strategic road corridors from the capital, Mexico City, manage 45% of road freight and general traffic: the link with Nogales, on the border with Arizona, a second one with Nuevo Laredo, on the way to Texas and the central axis that connects with the Veracruz Port on the Gulf of Mexico. Planned road infrastructure updates aim to not only fully modernise the main corridors, but also to create new options that might help to alleviate traffic on the busier routes.

During Felipe Calderón’s six-year term as president, the federal government’s budget for the construction and renovation of roads reached MXN288.6bn ($22.4bn). This was a major increase compared to previous years, allowing for the development of 748.5 km of new roads in 2012, compared to a total of 81 km in 2007, according to the SCT. The current administration’s goal is to increase the budget for new road construction by 36%, according to the ministry. Overall, authorities expect to build and revamp more than 19,000 km of roads and highways, 5410 km of which will constitute new thoroughfares. Most of the new roads will be established under build and operate models as part of a PPP agreements, which will allow the involved companies to manage revenues through a toll system.

EN ROUTE: Some road projects have carried over from the previous presidential term. Opened in late 2013, the Durango-Mazatlan highway runs for 230 km and connects the central region of the country with the Pacific coast. At a cost $2.16bn, the new link involved building 63 tunnels through mountainous terrain and a series of bridges, including the massive Baluarte Bridge, which, at 403 metres, is one of the world’s tallest suspension bridges. The project was awarded to a consortium made up of Omega Corporation, Tradeco Industrial, PCC Construccion and La Peninsular. One of the banner road projects scheduled for 2014 will be the MXN900m ($69.9m), 62-km Jantetelco-El Higuerón section of the Siglo XXI highway, which will eventually connect Morelos with Puebla. The project was awarded in late 2013 to a consortium of local companies, made up of Promotora y Operadora de Infraestructura, Grupo Bursátil Mexicano and the Mexican subsidiary of Spanish construction group Aldesa.

Already underway is the extension of the Jerez-Tlaltenango-Guadalajara highway, which is estimated to cost $1.1bn. A part of the Mexico City to Puebla freeway will also be expanded, with an elevated section of the highway to be built for $1.1bn, according to the Mexican Chamber for the Construction Industry. Another big project scheduled to start in the first half of 2014 is the 250-km highway connecting Tuxpan to Tampico, in the northeast, estimated to cost up to MXN7bn ($543.9m). The government announced that 50% of the cost would be covered by the National Infrastructure Fund.

Tenders for other major highway projects are due to launch in 2014, such as the 80-km, four-to-six lane highway between Atizapán, on the northern outskirts of Mexico City, to the town of Atlacomulco to the west. A further highway, expected to cover 70 km between Guanajuato and San Miguel de Allende is also to be tendered during the first half of 2014. Overall, the SCT plans to spend $4.5bn on road expansion and renovation during 2014, according to international media reports.

URBAN MOBILITY: Besides linking major economic zones, the authorities are also focused on improving transport inside Mexico’s sprawling urban centres, where the majority of the population now lives. Inner city transportation has had a bad reputation in Mexico City, one of the world’s most populous cities. Despite some remaining challenges, much has been done to improve the life of its millions of daily commuters.

A reshuffling of the city’s urban transport network expanded the Metrobús, a system of environmentally friendly buses that has been operating since 2006. The system now carries an average of 800,000 commuters every day, running on five exclusive lanes that intersect the city at various points and ease connections to the subway. Municipal authorities expect to open five more Metrobús lines over the next five years, at which point the Metrobús network will extend 195 km.

Already one of the world’s largest subway networks, the Mexico City Metro System expanded in 2012, opening a new connection between Tláhuac and Mixcoac. The 25-km line connects 20 stations and cost $1.9bn. Additional expansion work on a 4.1-km extension is set to begin in 2014 and cost $153m, linking Mixcoac to Observatorio. In all, the Mexico City Metro System extends for 226 km, encompassing 195 stations.

Similar expansion projects are happening in other cities. The Monterey metro is set to get a $2.8bn third line, which will include 14 elevated stations. The link is expected to be completed in 2015. Work has also started on a $92.3m cable car in the Ecatepec, in the State of Mexico. The 190-cabin cable will be able to move 3000 people an hour over the Guadalupe Valley. The 4.5-km connection is scheduled to start operations in 2015, according to local media reports.

Another measure that has helped boost urban mobility in the capital is Ecobici, a network of shared bicycles that can be rented on a weekly, monthly or yearly basis for the daily commute. The programme has around 87,000 registered users who can collect or drop off the bicycles in 275 docking stations around the city.

AIRPORTS: Mexico is also focusing attention on its airport infrastructure. A network of 76 airports allows for easy travel between all regions of the country, although the 17 busiest facilities manage 88% of Mexico’s traffic, according to the SCT. Of the 84.6m passengers carried in Mexico in 2012, authorities estimate that some 34% of them were processed through the Benito Juárez Airport in Mexico City. The second busiest airport was Cancún International Airport, which processed 17% of passengers, followed by Guadalajara and Monterey airports, with 9% and 7%, respectively. Between February 2013 and February 2014, domestic passengers going via the country’s airports rose 9% and international passengers increased by 11.3%. Total passenger numbers in 2013 reached 93.1m. One of the main airport projects over the coming years will be the building of the new Mexico City Airport, which has been mentioned by the government but is not a part of the SCT’s current project list. The government has said that a tender for the large undertaking might be launched in 2014, although it remains unclear whether the project will include an expansion of the existing airport into lands currently owned by the government, or if it will entail the construction of a completely new facility away from Benito Juárez International Airport.

“Studies on the potential location of the new Mexico City airport are still under way. The main discussions, however, revolve around how to structure the financial scheme, as this is a strategic project that involves both the federal district and the federation,” Miguel Ángel Mancera, head of government of the federal district, told OBG.

Already approved is MXN1bn ($77.7m) for the modernisation for the El Lencero Airport in Veracruz. The project includes an extension of the runway, which will increase from 1700 metres to 2100 metres. In Cancún, which receives many foreign visitors, a MXN4.9bn ($380.7m) renovation project will be used to expand terminal 3 and build a fourth terminal by 2016. Smaller scale revamping is also to take place in airports in Cozumel, Oaxaca, Villahermosa, Mérida and Huatulco.

PORT REVAMP: More important for trade, though, will be the strengthening of Mexico’s ports. With coastlines opening up to both the Pacific and the Atlantic oceans, sea transport is strategic for the economy. Despite having a network of 117 ports, marinas and terminals, underinvestment in some facilities has led to excessive concentration of activity in a handful of locations.

A renovation programme is set to double Mexico’s total port capacity by 2018. It also seeks to increase efficient usage of existing infrastructure. Currently, eight facilities handle about 70% of all sea freight. Furthermore, four of the country’s ports – Altamira, Veracruz, Manzanillo and Lázaro Carndenas – manage 96% of all container traffic, 65% of grain movement, 40% of minerals and 38% of general cargo, according to the SCT. Part of the concentration of activity on these four ports is related to their accessibility to other types of transport. Lázaro Cardenas, Altamira and Veracruz all have a multimodal terminal, with connections to the railway system and the highway network.

In 2013, according to the SCT, local ports handled 288m tonnes of cargo, but authorities want this to increase to at least 500 tonnes a year by the end of the current presidential term. Efforts to upgrade port facilities started under the previous administration, when authorities invested MXN49.6bn ($3.85bn) in port modernisation. The government aims to invest an additional MXN62bn ($4.8bn) for the current term, which will involve both facility upgrades and improvements to port management. “Mexican ports are very competitive, even compared to neighbouring countries, and complete cargo operations with an average time of 12 hours,” Mauricio Boy, president and CEO of Cargo Group International, a global logistics provider, told OBG WIDER BERTHS: One of the biggest development projects is expansion of the Veracruz port, on the Gulf coast. Estimated to cost up to MXN60bn ($4.7bn), according to the SCT, the project involves the construction of a 2800-metre dock, which will include eight 350-metre berths and allow for handling capacity to rise from 22m tonnes a year to about 80m tonnes. The project is set to be tendered during the course of 2014.

Expansion work is also expected at the Lázaro Cardenas port, in the Michoacán State, which is set to become one of the major ports on the Pacific coast. In November 2013 federal authorities moved to take control of the port because of security concerns related to organised crime, although government intervention has helped to calm things down. Rubén Imán, general manager of Onest Logistics, told OBG, "Security measures in road transport have been increased leading to a significant impact on transport costs, which have risen by 12%-15% in the past two years because of the use of custody guards in distribution. As for rail transportation, the volume of robberies is not that high but the problem lies in the lack of commitment in delivery time by the carrier. This has generated some distrust in potential customers that fear the absence of responsibilities, even more than potential attacks. For this reason the shippers prefer the use of road transportation.”

Already under way is the construction of a new $900m terminal, to be built and operated by APM Terminals, a Maersk Group subsidiary, with a concession period of 32 years. The first phase, budgeted at $300m, is set to be completed in 2015, and the total expansion will add 102 ha to the port area, and a quay of more than 1400 metres. The modernisation of the Lázaro Carndenas port will transform it into the first automated port facility in Latin America and allow for the handling of container ships of up to 15,000 twenty-foot equivalent units (TEUs). The International Financing Corporation will co-finance the project, providing $300m, more than a third of the total expected cost. The expansion should prove critical to boosting efficiencies at one of the country’s busiest ports. In 2012 Lázaro Cardenas handled 37% of the total container traffic on Mexico’s Pacific coast.

MORE CARGO: Also under way is the revamping of the Guaymas port in the northern State of Sonora. The expansion is expected to transform the facility into the one of the larger ports in the country, raising handling capacity from 8m tonnes of cargo to 30m tonnes a year. The first phase began in November 2013, with the dredging of the seafloor, essential for the port to be able to receive 130,000-tonne ships. Also included in the first phase is the construction of 10 berths. The total project is expected to cost MXN7.2bn ($559.4m). In addition to supporting the region’s manufacturing centres, an upgrade of the port might also position it to serve the State of Arizona, which was traditionally served by the now congested ports in California.

Long under discussion, with the potential to develop the southern regions of Mexico, is the project to create a logistics link in the Tehuantepec Isthmus. The Transistmico Corridor would compete with the Panama Canal, by connecting the port of Salinas Cruz, on the Pacific coast, to the port of Coatzacoalcos on the Atlantic. Local authorities on both sides are trying to include the project in the current infrastructure development plans, and the federal government has supported the initiative. Estimated to cost up to $1.2bn, it involves the revamping of both ports, as well as the construction of a second railway link to cover the 310 km separating the two coasts, as well as the renovation and expansion of road links in the region. In late 2013 the government approved MXN500m ($38.85m) for initial studies. Both government funds and private investment will likely be needed to complete the project.

RAIL: International trade has also benefitted from a restructuring of the train network. The privatisation of Mexico’s aged rail infrastructure in the mid-1990s allowed a modern and efficient railway network to emerge. To attract investment and modernise the tracks, authorities sold railway concessions on a regional basis, allowing each firm to manage a specific part of Mexico’s rails. This has enabled a total of $7bn to be invested in the system since privatisation. The whole railway system is now operated by private companies on 30-year concession deals. The biggest operator is Ferromex, which manages the tracks in the northwest of the country and is owned by mining conglomerate Grupo México, which also controls Ferrosur, covering several connections in Mexico’s southern states. Another operator, Kansas City Southern, manages the northeast rail concession. The revamping of the rail system has made it easier to move freight across the country and facilitated trade with the US (see analysis).

The SCT is also hoping to enhance rail usage for passenger travel. Most of this effort will come through the launch of new train connections, set to comprise $7.4bn in tendered projects in 2014 alone. Two of the new projects will help improve connections to Mexico City. A 30-km line will link the capital with the city of Toluca to the west and allow for speeds of up to 160 km per hour. This is expected to have a positive impact on the Mexico City-Toluca highway, currently one of the busiest thoroughfares in the country. A high-speed 200-km-long track will connect Mexico City with the industrial hub of Querétaro to the northeast. The $4.5bn railway is to be completed by 2016 and support a future link with Guadalajara. Another passenger railway link is planned to make travel around the Yucatán peninsula easier, connecting the tourist region of the Riviera Maya to the city of Mérida, 250 km away. Authorities are considering whether to allow freight transport at night, which would add economic viability to the project.

OUTLOOK: Better road and railway links will be needed to support growth expected from ongoing economic reforms. Mexico will need to prove that regulations such as the new PPP law are an effective way to build large infrastructure. Legal clarity for existing concession holders will influence decisions on long-term private investment commitments for the whole sector.

Turning Mexico into a regional and global transport hub will depend not only on how the government manages large projects, but also whether it can attract private investment that benefits both investors and users.