Highlights of Mexico Infrastructure Forum 2016
More PPP Opportunities Expected for 2016
The private sector has a strong role to play in infrastructure development in Mexico, a panel of leading experts told the Mexico Infrastructure Forum 2016 on Wednesday at Mexico City’s Sheraton Maria Isabel hotel.
“The most important aspect is creating a viable PPP environment,” said Francisco Solares, Mexico City President of the Mexican Chamber of the Construction Industry (CMIC) as he kicked off the event with a presentation introducing the “Public and Private Sector Roles in Infrastructure” panel. “When the PPP law was created in 2012, there was a boom in the construction sector,” he said.
Due to budget reductions, there has been a significant drop in public sector investment, resulting in the public sector providing 25 percent of infrastructure funding while the private sector delivers 75 percent. “Budget cuts have had an effect on long-term projects,” said Solares. “The decline in commodity prices and volatility in international markets has also had an effect.”
However, Sergio Forte, Deputy General Manager of Investor Relations and the Bank of Investment Projects at Bancomext is confident that Mexico has developed a solid economy and remains a strong exporter for manufacturing industries like automotive and of raw materials like oil. “Reforms have strengthened the framework, especially for sectors like telecommunications and oil and gas,” he said.
Despite 2017 cuts that will produce a budget of MX$54 billion, or a reduction of 27 percent from this year, PPP projects have grown in popularity, with 16 PPP projects already scheduled for the next year.
Solares stressed the importance of the construction sector within this context. “Construction accounts for 8 percent of Mexico’s GDP, it is the fourth most important productive sector in the country and is the second biggest job creator, employing almost 26 percent of the country’s workers,” he said. “The sector represents MX$2.3 billion and on a global scale, Mexico’s infrastructure industry is 57th among 138 countries.”
Certain developments have contributed to the importance of the sector, the panel agreed. Firstly, the PPP Law promoted a better distribution of risk between the public and private sector. “The federal government is working to create a stronger framework for investment in infrastructure,” said Forte.
Secondly, Forte emphasized the importance of new financing mechanisms to boost access to PPP projects. “The number of financial instruments has broadened to provide greater investment opportunities for institutional investors.” Among those instruments are Fibras, which can be applied to the energy sector, shopping malls and residential developments.
“The private sector has a key role in breaching the financing gap,” said Forte, who believes Fibras could be one of the tools to do so. The private sector’s secondary role is making investment more efficient, he said.
Moderator Edmundo Gamas, Director General of the Mexican Institute of Infrastructure Development (IMEXDI), asked about the steps that could be taken to ensure the pipeline of NIP projects develops well and to promote new projects.
According to Solares, the main issue holding the projects back is uncertainty. “Right now, in a global context, we do not know what’s going to happen,” he said. “We do not know what the future will hold in terms of the TPP and NAFTA.” US President-elect Donald Trump has vowed to revisit both agreements.
Internally, there is also great uncertainty. “We have a lot of plans in Mexico but these plans have to adhere to six-year governmental terms,” said Solares. “This problem has been seen with the construction of the Circuito Interior, which was only recently completed, and with that of Periferico, which still hasn’t been completed.”
Solares imagined that around 80 percent of the projects envisioned in the NIP will be completed. Forte confirmed that Bancomext is trying to smooth the process for potential investors. “At Bancomext, we are developing an inventory of projects to give investors an idea of upcoming opportunities.”
Despite infrastructure’s emphasis on the long term, Gamas enquired about short-term solutions that could be implemented to provide more certainty to projects in the pipeline. For Solares, the key lies in solid planning.
Forte added that the gap should be bridged more efficiently between financing and construction at an earlier stage. “Right now, we are getting involved at the close of financing but there are important considerations at the tendering stage for example.”
US Uncertainty May Be A Blessing For Mexico
Mexico’s prime geographical location could empower the country to become a strategic logistics hub but only if the country’s infrastructure improves while reducing the nation’s reliance on the US, a group of experts told the Mexico Infrastructure Forum 2016 on Wednesday in Mexico City.
Juan Torres, Partner at Hogan Lovells, Pablo Flores, Director General of Maersk Line and Santiago Ortiz Monasterio, Director General of GBM Infraestructura participated in the panel “Transforming Mexico into a World-Class Logistics Hub” at the Sheraton Maria Isabel hotel.
“Mexico is close to one of the biggest markets in the word and it only takes 20 days to reach Asia and 25 to get to Europe from here through maritime transportation. That represents a great opportunity for the supply chain,” said Pablo Flores. He added the country also has enough potential to become a leading exporter of perishable products with its first-line port infrastructure.
The potential for trade disruption as a result of the recent US election also highlights the need for Mexico to diversify its export destinations. Flores said he believes there would be a different scenario given the possibility of foreign policy changes in the US, where President-elect Donald Trump is threatening to tear up trade agreements like the TPP. But this could be an opportunity for the country.
“Mexico has agreements with 46 countries and we are focused only on two. All the commercial efforts have been focused on the US and Canada. Eighty percent of the exports go there but there are many growing economies and industries where we can look for new clients,” Flores said.
Despite the Mexico’s advantages, numerous issues are restraining development. That manufacturing centers are not on the coast is a problem given the lack of interconnection of railroads and highways, according to Torres. The participation of private companies is essential to solve this issue but there, too, hurdles stand in the way. “The big problem that private companies have with the government are the legal rights,” said Ortiz. He believes the government’s legal framework has improved but not that much, which hinders the participation of private capital.
More financial tools for infrastructure are now available and Ortiz said the first step to promote economic development should be to use the resources saved by Mexican employees. “Fibra E improves the fiscal transparency of the afores,” he said. The panelists agreed that there are now a good variety of financial instruments that can be used for infrastructure development but there are not enough projects.
Juan Torres proposed the possibility of entering tenders but according to Ortiz, the infrastructure sector has not been efficient enough under these schemes. “There is a competitive advantage in the tender but there is not enough security. I see that many developers have given up due to the risk their projects might not materialize.” He believes there should be a bigger aperture for developers to share thoughts and to have access to more information. Torres suggested the federal government should take a greater leading role because in this situation there are interest groups that can determine the outcome of the negotiation.
Perhaps the biggest barrier blocking Mexico´s development is its habit of playing catch-up. “What we usually do is receive the investment and then improve the infrastructure,” Flores said. “There are many agreements and companies are interested but we are behind. If we could improve the infrastructure, we could grow much more,” he said.
Ortiz agreed and added that Mexico should keep up and try to make the investments now and not as a consequence of an investment.
“We are missing the capacity to look beyond,” Torres said. “A basic example is the Mexico City airport. We waited until the current airport could no longer manage the capacity, to finally improve it. Infrastructure should be the power for development and not an obstacle to growth.”
Many Barriers Preventing Mexico From Going “Smart”
When it comes to developing smart cities, outdated paradigms in the country’s capital do not permit the entrance of new technology or efficient transportation and mobility, a group of experts told the Mexico Infrastructure Forum 2016 on Wednesday in Mexico City.
Laura Ballesteros, Undersecretary of Planning at the Ministry of Mobility (SEMOVI), Adriana Lobo, Executive Director of WRI Mexico, Ernesto López, Vice President of Partner Projects at Schneider Electric, Francisco Torres, Building Technologies Manager at Siemens and moderator Gabriel Ballesteros, Partner at Ballesteros Mureddu, participated in the panel “Creating Resilient Smart Cities through Urban Planning and Technology” at the Sheraton Maria Isabel hotel.
“Mexico City has a massive scale. It is similar to the size of large Asian cities and 9 million people travel within it every day,” said Ballesteros. “To face the challenges of mobility, we need a budget of MX$6 billion and unfortunately it was reduced by billions. The role of governance and the public budget have to be defined to satisfy the needs of the population.”
The main problem in Mexico City is that it depends on an old mobility scheme that does not meet the demands of its users and combined with the size of the megalopolis, the government and the private sector have a tough hurdle to jump.
The SEMOVI official added that the old model is to the point of breaking as it focuses on vehicles when it should revolve around the transportation of people. “Mexico City cannot keep its outdated infrastructure and hope to somehow reduce emissions and traffic congestion. We need to administrate the number of cars on the city’s limited surface and promote public transportation.”
Smart cities encompass a wide range of matters from traffic to culture, from the purchase of tickets to events and operating traffic lights, said moderator Ballesteros. The idea is to optimize resources and more importantly, promote the development of “smart” citizens who minimize the amount of waste.
Regulatory changes, such as the new human settlement law, are helping to recast the discussion. “It was a concept that took four years to develop. It incorporates the importance of resilience, a new topic within the political and academic agenda that is still being digested,” said Lobo.
The new law will boost governance within the metropolitan area to encompass a more coordinated administrative and regulatory network, said Undersecretary Ballesteros. “The city proved its resilience by working together to fix the contingency issues in 2016 and has orchestrated a new model to combat the future challenges. There may not be any immediate answers but we can take action to make more concrete long-term solutions.”
The panelists agreed the issue is a countrywide problem, that responsibility is no longer solely in the hands of the government and that energy usage will play a role going forward.
“Mobility issues, such as the problem with the city’s road design, have not been resolved. Different governments and initiatives from the public and private sector have allowed us to further concentrate on water and waste issues but we also need to consider that the Internet of Things and the related databases use large amounts of energy. We need to make more energy to meet the demand resulting from these changes,” said Schneider Electric’s López. “The issue to is to establish and generate electricity while being able to make a return on investment for both the public and private sector.”
Lobo added that when it comes to the investment in governance the problem is that what is written down in plans is not being executed. Gabriel Ballesteros pointed out, however, that Mexico is covering fresh ground with new policies that are breaking barriers and creating a new phase in the country’s energy sector.
Torres suggested New York City metro as an example of what is possible. While it may not be the most aesthetically pleasing, it is one of the most effective, he said.
“We need to focus on the efficiency of mobility and analyze the metro and energy automation; the Internet of Things is unstoppable; we need to know that information requires energy,” he said. “There are people in the city that have to travel three hours daily, which implies a need to better plan human settlement and the construction of housing. There is a lot of technology available but cities must select and choose the tools that will minimize the issues cities face.”
But Torres had a caveat: the country is not necessarily ready to accept what’s available. “Mexico’s infrastructure is not ready for new technology and the idea is to create energy, distribute it and then attract new technology.”
Financial Tools Empower Mexico’s Real Estate Market
Mexico’s real estate market has a green light for growth thanks to financing opportunities like Fibras and CerPIs, a group of experts told the Mexico Infrastructure Forum 2016 on Wednesday in Mexico City.
“Five years ago, there was a boom after the arrival of Fibras, the financial vehicle that propelled the real estate market in Mexico,” said Luis Mendez, President of Coldwell Banker Commercial, during the panel “The Driving Force behind Mexico’s Real Estate Market” at the Sheraton Maria Isabel hotel.
Javier Llaca, Co-founder and Director of Operations and Acquisitions of Fibra Mty, believes the Mexican market is undergoing a positive change as it promotes the development of projects using these financial opportunities. “Considering the value of the stock market I believe there is a chance for more Fibras and also to promote other vehicles like CKDs.” However, Llaca said that despite the cash flow in Mexico from public and private parties, there are not enough appropriate proposals for this type of capital.
Mexico’s real estate business is relatively young, said Jorge Pigeon, Vice President of Investor Relations at Fibra Uno. For that reason, it moves differently depending on the sector. “Mexico is developing its office market. It is too recent to see strong development and considering the size of our country, there is still a lot to do in real state,” said Pigeon. “Madrid’s real estate market for offices is five times bigger than Mexico’s and we have a much larger market.”
Fibra Uno is focused on the office segment and in the multi-use space. It is investing in this type of product given the potential of cities like Mexico City. “There is a demand for real state,” said Pigeon. However, the common belief, according to Llaca, is that there is more money to invest than good projects to invest in.
But Víctor Mena, Director General of Group DRT, pointed out that some market niches enjoyed more offers than projects, such as in offices and commercial buildings. “When developing a project, it is easy to believe there is a way out, especially when you do things right and you get investors. But we have to be more careful when putting money in,” he added.
The panelists said they see great potential for real estate in different areas of the country. For Group DRT industrial real estate in the Bajio region is promising. “We feel there are a lot opportunities due to the automobile and domestic electronics industries that are setting up in this area,” said Mena.
For Coldwell Banker Mexico, the office business is focused in the golden triangle: Mexico City, Guadalajara and Monterrey. Mendez said there are very interesting markets like Leon, the Bajio, Chihuahua and San Luis Potosi for back office and industrial real estate. He also sees potential in Guadalajara and Aguascalientes because of the many technology companies in those areas, and in Manzanillo, which is an increasingly strong port.
Housing is another interesting segment for the industry but a weak legal framework has restrained investment. “It is a segment with a lot of demand from the corporate area but it lacks regulation and professionalism,” said Mena. Fibra Mty’s Llaca believes this area needs structure and capital but still considers it an interesting niche. “It is a sector we are enthusiastic about and is underdeveloped in Mexico. There are CKDs that want to focus on the sector.”
Mena sees an opportunity with the verticalization of the industry but there are challenges, such as finding the right location and the right product in the right niche. “As a developer, you affect people’s quality of life. Therefore, the purpose is to create something people appreciate and value.”
Added Pigeon: “The real estate business is a long-term business and we are liking what we foresee in Mexico for the next 10 or 15 years.” Despite the world’s current political and economic volatility, it is a good moment to invest, he said. “It is necessary to stay firm and see things clearly despite the noise.”
Sustainability, US Election at Forefront of Infrastructure Issues
Construction companies across the industry have accepted new responsibilities that emphasize the importance of urban sustainability, resource optimization and the social impact of buildings, a group of experts told the Mexico Infrastructure Forum 2016 on Wednesday in Mexico City.
“Buildings are no longer isolated, they must be fully integrated into the urban environment,” said Francisco Martin del Campo, founding partner at Arquitectoma. “They must have a mixed use that includes recreational, residential, work and public spaces. The last one is particularly essential because designers have a duty to give back to the community through the design of the project.“
Brenda Salas, Industry Analyst & Journalist of Mexico Infrastructure Review, Gabriel Santana, Director of Business Development at ITISA and Alejandro Varés, VP of Infrastructure and Government at CEMEX, also participated in the panel “Innovation: The Future of Mexico’s Infrastructure” at the Sheraton Maria Isabel hotel.
Sustainability is an increasingly important issue within the industry. “Buildings must try to optimize the use of resources and social impact while striving to improve people’s quality of life,” said Varés. “Companies have to look above and beyond construction.”
Varés added that sustainability is an ethical and moral issue that companies have an obligation to consider. “Technology allows the possibility of buildings that autogenerate electricity. It promotes an efficient use of space in buildings because these tools take advantage of areas like the roof,” he said. “When it comes to water, structures can even incorporate treatment plants that can reuse the liquid to water plants and for bathrooms.”
Minimizing a company’s carbon footprint is a priority. “Optimization is more than simply reducing costs. Companies need to consider the cost of maintenance and the material’s impact on the project’s life cycle. It is important to analyze the value of the available material and options,” Varés said.
The experts also considered the international fallout from the US elections — won by Donald Trump, who has said he will revisit trade deals — and the possible changes to commercial relations, along with the federal budget cuts that are impacting infrastructure projects.
“The US election is affecting our relationship with clients because the results were unexpected,” said Santana. He also referenced the lower price of the peso against the dollar. “We are analyzing the context and making an effort to not inflate their project budgets, considering the change in the cost of material.”
Del Campo added that the US election result would create a tough environment in the short term. “Certain projects are on hold considering that the climate is still being measured. We are not sure yet how the context will continue to develop financially nor its impact on project budgets.”
Projects need to be designed more efficiently considering the lack of capital, said Vares. “The most advanced countries in the infrastructure sector highly facilitate documentation processes. The more the process is simplified, the easier it is to complete projects and improve the quality of life in the country while increasing the return on investment.”
Del Campo stated that private investment also benefits the continuation of projects, as public projects are at risk of being cut with the entrance of a new administration in Mexico. “It would diminish the number of unfinished projects.” Mexican presidential elections will be held in 2018.
The panelists agreed that while Mexico has areas of opportunities, almost all infrastructure projects see immediate demand upon completion. “Residential projects are particularly up for grabs. Areas like the Bajio have plenty of room for growth. Mexico City on the other hand is oversaturated. A mixed-use space on Reforma (a key artery in the capital) can have a value of up to MX$14,000 per square meter. It is important to be cautious but the opportunities are definitely there,” said del Campo.
Santana added that there are many viable projects private companies could develop if the public sector was quicker to approve. “Mexico has so much demand when it comes to infrastructure that almost any type of structure built is immediately occupied.” There is a large gap to fill considering that Mexico has 15 times fewer commercial centers than the US and four times fewer than Brazil.
“We will continue to see the formalization of the Mexican infrastructure industry,” said Varés. “Mexico can no longer simply leave projects halfway built and put construction companies at risk of bankruptcy as it did in the past.”
PPPs: The Financial Key to Mexico’s Infrastructure Development
Fibras, CKDs, private equity and strategic alliances between the public and private sector have allowed the infrastructure industry to develop in the last few years, a group of experts told the Mexico Infrastructure Forum 2016 on Wednesday in Mexico City during the panel “Financing Mexico’s Infrastructure Development.”
Financial vehicles like equity funds are innovating to offer more diverse investment options. “We have alternative equity funds for specific projects that provide certainty to the investor,” Alberto de la Parra, Partner at Jones Day, said at the event held at the Sheraton Maria Isabel hotel. “Also, through project finance we have achieved many successes by paying close attention to how each scheme is structured based on the legal and social context of each project.”
The panelists agreed the model of private equity is an opportunity for small companies to learn how to work with someone else with minimum risks. However, Ernesto González, Managing Director of Macquarie Infrastructure and Real Assets, said it was important to first evaluate the potential of each project and its utility to avoid investing in useless infrastructure.
The main driver of investments, however, has been the creation of public-private associations. Francisco Cobo, Partner of Project Finance/Energy and Infrastructure at EY, believes most of the current infrastructure projects are born in the public sector. But Francisco Dueñas, Corporate Director of Finance at the Mexico City Airport Group (GACM), said private capital has the potential to underpin projects.
“Given budget cuts, the public sector has successfully approached private capital,” Dueñas said. Recent regulatory reforms have helped contracts become more secure, inviting the participation of private enterprises. One example is the new Mexico City airport, NAICM. The objectives for the airport project, said Dueñas, were achieving an infrastructure design that did not exceed the government’s budget, minimizing the costs of funding by offsetting the risks while constructing over the actual airport and establishing a very flexible financing structure.
The airport project is financed with a credit of US$3 billion in five-year revolving debt with a two-year extension and a US$1 billion green bond that was six times oversubscribed. “We are on the second phase of financing. We have already invested US$2 billion for 10 and 30 years,” Dueñas said. “We have a diversified funding scheme with investors from the airport sector and other industries, and as the project was developing we found new innovative structures. We plan to expand the investor base over the long term.”
Alternative financing schemes are becoming more popular across the industry. According to de la Parra, there are many funds in Mexico dedicated to checking the pipeline of infrastructure projects. “They are taking over 70 percent of the projects and institutionalizing them. We have seen this alternative capital supporting projects with a second level of risks,” he said.
The trend toward more sophisticated players entering the market shows no sign of slowing. “There are also projects that are becoming more effective when sponsored with tools like Fibra E and CKDs,” said Dueñas.
Considering Mexico’s position against other countries, the current uncertainty caused by the US political changes may leave Mexico behind other nations in South America, said Cobo.
To counter this, the panelist said there was a need to promote risk management. “The associations between the public and private sectors help distribute and mitigate risk,” said Cobo. “If these agents are well aligned projects will succeed.”
However, Eduardo Flores, Vice President of Securities Supervision at the National Banking and Securities Commissions (CNBV), believes there should be better promotion of the local resources and capital benefits. “There is money. We just have to find the way to guide it,” he said.
NAICM on Track Despite Challenges
Despite a great number of challenges, NAICM is well on schedule to open by October 2020, according to a panel of the leading companies working on the project at Mexico Infrastructure Forum 2016 at the Sheraton Maria Isabel in Mexico City on Wednesday.
This year, according to Federico Patiño, Director General of Grupo Aeroportuario de la Ciudad de Mexico (GACM), 100 percent of the tenders will have been launched by the end of this year. “In December 2016, GACM will begin to receive bids for the NAICM terminal and control tower,” he said.
In an exclusive presentation, Patiño revealed the extent of the interest in the megaproject. “Consultations for road projects normally receive between 20-30 enquiries,” he said. “The NAICM project received more than 5,000.”
For the panel, a priority was ensuring the project adhered to international best practices. “We are discussing the possibility of assembling a panel of experts to resolve disputes,” said Rodrigo Ariza, Deputy Program Director and Chief of Operations at Parsons. Patiño went further, saying that “future generations will never forgive us if we make a mistake with NAICM.”
Moderator Gabriela Crespo, Director of Energy at Revitaliza Consultores, was interested to learn about the process toward LEED certification since NAICM is targeting the illusive Platinum certification. Patiño was confident the project will reach these standards due to its innovative engineering. “Twenty-one columns will be built to capture and reuse rainwater, among other features.”
Patiño believes that incorporating and supporting SMEs into the tendering process required a great deal of attention. “In fact, 70 percent of the companies in the tendering process were Mexican, and many were SMEs,” he said.
Various challenges with the project’s development were discussed. Patiño pointed to the unstable soil and said that nine tests had to be carried out to establish which material would be most suitable for the foundations. Crespo mirrored this sentiment in her observation that the magnitude of the project was the greatest challenge.
Equally, Uriel Torres, Commercial Director of Corporate Relations at SITA, believes that technology should be prominent in NAICM. “All infrastructure projects are dependent on technology and are intrinsically linked to end users,” he said.
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