Mexico Infrastructure Investment

By: Roberto Erana & Alexander P. Trueba

Mexican President Enrique Peña Nieto and his administration are making major efforts to improve infrastructure within Mexico. Despite being Latin America’s second largest economy, Mexico ranked 66th out of 148 countries in infrastructure quality according to the WEF’s “Global Competitiveness Report for 2013-2014.”President Peña Nieto recently proposed a bold National Infrastructure Program (PNI, by its Spanish acronym) for 2014-2018, which, combined with new federal Private-Public Partnership (PPP) laws, is expected to help modernize and rehabilitate the nation’s infrastructure capabilities, draw private sector investment and make a significant impact on the long-term health of the Mexican economy.

Peña Nieto’s PNI

On April 28th 2014, Peña Nieto unveiled an ambitious US $596 billion infrastructure initiative to increase Mexico’s economic competitiveness and help lure more foreign private investors to the country. An estimated 63% of the plan’s total programmed investment will be financed with public funds, while the private sector will contribute the remaining 37%. Peña Nieto’s proposed initiative is nearly double the size of the 2007-2012 program, introduced by former President Enrique Calderón, which called for US $234 billion in infrastructure investment for some 300 projects. The ex-president’s program was a step in the right direction for Mexico, lifting infrastructure spending from 3.0% of gross domestic product (GDP), to 5.0%. However, as with any inaugural project, there were some delays and incomplete projects. Peña Nieto’s proposed PNI plans to build on the positive momentum of its predecessor, while working out the previous kinks and increasing funding. The President’s proposed initiative consists of 743 projects spanning six sectors — energy (262), communications and transportation (223), water (84), tourism (83), health (87) and urban development and housing (4) — and mainly targeting three regions: North, Central and South-Southeast Mexico.

Sector Breakdown

Mexico’s energy sector is on track to receive the most funding; approximately 50% of the PNI’s overall funds (US $300 billion) will go towards 262 projects. Specifically, state-owned oil company Petróleos Mexicanos (Pemex) will receive 85% of the allotted energy sector funding, approximately US $254 billion. Pemex will utilize a majority of the funds to ramp up exploration and production activities, as well as to modernize and expand its processing capacity. The drilling of development wells in Mexico’s three most productive oil fields, Ku-Maloob-Zaap (US $19 billion), Cantarell (US $18 billion), and Tsimin-Xux (US $8.0 billion), will take center stage. Meanwhile, the Comisión Federal de Electricidad (CFE) will receive the remaining 15% of allocated energy sector funds (US $46 billion) to assist in the construction and enhancement of 138 projects. The capital will mainly be contributed towards enhancing generation operations, such as the construction of combined cycle and hydroelectric power plants, natural gas transportation, and wind turbines.

However, energy is not Mexico’s only sector gearing up for improvements. A substantial portion of funds from the PNI, over US $100 billion (17% of total PNI funds), will go towards 223 communications and transportation projects. Over 54% of projects will involve the expansion and modernization of existing infrastructure, while the remaining 46% will consist of brand new construction. Private sector contribution in the communications and transportation sector is projected to exceed US $57 billion, with many projects falling under the Public-Private Partnership (PPP) model. The lion’s share of total investment for this sector will go towards telecommunications and road infrastructure projects, US $52 billion and US $30 billion, respectively. The respective funds will be allocated amongst only 5 telecommunications projects and 151 road infrastructure projects. Major projects include the installation of a shared mobile service network and the conservation and rehabilitation of over 48,300 kilometers of federal toll-roads. Railway and Port projects will also see significant investment, US $11 billion and US $5.0 billion respectively. The construction of the Querétaro-Mexico City fast train (US $3.3 billion), and the Mexico City-Toluca intercity train (US $3.0 billion), highlight the railway projects and expected completion is estimated by 2017; the expansion of the Port of Veracruz (US $1.8 billion), headlines port sector investment.

Meanwhile, investment in urban development & housing will be featured prominently in Peña Nieto’s proposed plan, 24% of all PNI funds will be directed to the segment. The government expects to fund 53% of the projected $143 billion investment, with the balance of funds coming from the private sector. The government will provide continued financing to workers for the procurement of housing. The remaining sectors, water, tourism, and health, will receive a total US $52 billion in funding, roughly 9.0% of the PNI’s overall investment. Of the 254 proposed water, tourism and health projects, the Central Region’s East Drainage Tunnel (US $2.9 billion), North Region’s Aqueduct (US $1.4 billion), and Central Region’s Zapotillo Dam (US $1.2 billion) will receive the highest level of investment.

Private-Public Partnerships

Lending appeal to the PNI is the recent introduction of a new PPP law aimed at attracting foreign capital by providing investors and developers with a more stable investment environment. The new PPP guidelines, passed in 2012 and a major step up from previous legislation, include a variety of provisions ranging from a more efficient and transparent bidding process, to dispute resolution by way of arbitration. Private sector resources will play an active role in funding Peña Nieto’s PNI, contributing over US $160 billion. The communications and transport, tourism, urban development and housing, and energy sectors will benefit most from the new PPP framework. Fifty-eight percent (58%) of the capital dedicated to the communications and transport sector, US $58 billion, will come from private investment. Meanwhile, private investment will make up 62%, 47%, and 27%, respectively in the tourism, urban development and housing, and energy sectors.

To qualify as a PPP, the project company (winning consortium) must build new infrastructure or make improvements to existing infrastructure. In turn, the contracting government authority is responsible for helping the developer obtain any necessary permits for the project. Upon completion of the contract, which can range between three and forty years, control and ownership of the infrastructure project is given back to the contracting authority.

Contract terms under the new PPP framework lay out, among other things, minimum terms and conditions, permits and authorizations, temporary step-in rights for the lender, assignment rights, clear risk allocation, security interests, termination causes, and renegotiation terms. These features provide the government and the private sector with a well-structured framework as infrastructure projects move through the conception, construction, and operation phases.

The Road Ahead

Looking onward, Peña Nieto’s proposed PNI appears to be the necessary push to modernize and strengthen Mexico’s infrastructure sector. In tandem with Mexico’s new PPP law, which protects developers’ and private investors’ interests more thoroughly, the PNI will fashion a more positive investment climate. Overall, the PNI will create over 350,000 jobs yearly, attract new foreign investors, target previously overlooked areas of the country and strengthen economic growth for years to come.


Sources: BNamericas, PwC, White & Case, World Economic Forum