(The article below was originally published in LatinFinance Magazine)
As energy prices soar, Mexico is emerging as the top choice to build factories for supplying the United States. It’s far closer than Asia. But a deficit of efficient infrastructure is holding some back. The Mexican government hopes to change this by enlisting the private sector to build more energy and transport infrastructure, a strategy that’s starting to pay off. BY RODRIGO ALONSO CRUZ
Truckers have never had it easy in central Mexico. To move goods, for example, from the Port of Veracruz on the east coast to Mexico City and nearby western cities like Toluca, they had to brave the snarling traffic on roads running right through the country’s capital.
It was bad for any motorist. Mexico City ranked the worst for road congestion in the world in 2015, with motorists losing an average of 219 hours in traffic that year, according to TomTom, an Amsterdam-based location technology developer. The capital, population 9.2 million, held that spot for years until finally falling to 28 in the world in 2021, but still with a loss of 119 hours stuck in traffic.
This loss of time can be reduced across Mexico with more projects like Circuito Exterior Mexiquense, a toll road in and around Mexico City that launched in 2011. The road has helped speed up the movement of cargo from the Port of Veracruz to Mexico City, Toluca, Querétaro and Puebla. It’s become popular, too. Traffic on the highway rose a year-on-year 17% in the first quarter of this year, according to Aleatica, a Spanish infrastructure company that built and operates the toll road.
“If that is replicated in all areas of the country, you can make the country very competitive,” says Rubén López, the Mexican head of Aleatica, which is owned by the Australian investment firm IFM Investors. Aleatica has other such projects on the drawing board, including the Atizapán-Atlacomulco highway and interconnection works with the Felipe Angeles International Airport outside Mexico City.
These projects may very well get off the ground.
Mexico is rallying the private sector to build better roads and other infrastructure, from ports to free-trade zones and railways, to improve connectivity, reduce costs, boost competitiveness and widen exports. The government is supporting this expansion through a $43 billion infrastructure plan to be carried out between 2020 and 19/7/22, 22:19 Mexican Infrastructure infrastructure plan to be carried out between 2020 and 2024 via a total of 147 projects. The overarching goal is to boost economic growth.
The government has already announced private sector-led investments of more than MXN525 billion ($26 billion) in 68 projects in the first two so-called infrastructure packages of the plan in 2019 and 2020. The third package is expected to include 47 projects with MXN300 billion in investment in airports and roads, including the Corredor Transístmico highway to connect the Gulf of Mexico to the Pacific Ocean across the Isthmus of Tehuantepec.
The need to improve infrastructure has been gaining in importance in Mexico this year as inflation surges, led by higher global commodity prices and supply-chain disruptions. Russia’s war on Ukraine has reduced the supply of energy and food from those natural resource-rich countries, worsening the worldwide supply-chain disruptions that are still recovering from the long lockdowns during the COVID-19 pandemic.
The global problems have led to a rise in inflation to above 7% in Mexico, the highest in two decades, threatening to slow the already sluggish economy. The economy is on track for no more than 2% growth between this year and 2024, less than the 4% average for emerging markets and developing countries nearly 5% in China and East Asia over the same period, according to the World Bank.
Better infrastructure will not only foster stronger economic growth but will also help Mexico compete with East Asia for private investment across sectors. Mexico must have “a long-term plan for the economy like the Chinese,” which has specialized in producing services and cheap manufacturing, says Janneth Quiroz, chief economist at Monex Grupo Financiero, a financial services company in Mexico City. Such a plan would attract more private investment, helping to diversify the economy and make Mexico “more self-sufficient,” a key for reducing a reliance on imports from China and Russia and the global supply shocks that affect inflation, she adds.
But to make this possible, “it is necessary to invest in roads, highways, buildings, factories and infrastructure,” Quiroz says.
CLOSER TO HOME
More investment has been flowing into Mexico over the past few years. The pandemic and the subsequent supply-chain disruptions followed by this year’s surge in global commodity prices have made Mexico more attractive for nearshoring operations, or sourcing business processes in a nearby country.
Mexico had lost much of that investment to China and East Asia over the past few decades, but now interest has returned to Mexico as a spot to service the US market. The US-China trade war that swelled under former US President Donald Trump has increased the cost of Chinese imports, as have the restrictions on some of the goods from China for human rights abuses.
At the same time, the surge in fuel costs this year coupled with continued shipping delays have made it more expensive to bring goods into the United States from China.
Mexico, as part of a free trade agreement with Canada and the US, is poised to capture more nearshoring investment. This could accelerate Mexico’s annual export growth by two percentage points to between 6% and 7% from the manufacturing sector, equivalent to $8 billion in additional export revenue, according to a report from Bain & Company.
Mexico has a lot to do to improve its attractiveness for nearshoring. According to the International Institute for Management Development, Mexico’s infrastructure has ranked between 55 and 58 in the world for efficiency since 2018, far less than China at between 13 and 17.
In December 2020, the Mexican government announced a program to boost productivity and competitiveness, including by improving infrastructure. The Atizapán-Atlacomulco project could help in this drive. The proposed 77 km highway, which would connect northwest Mexico City with the north and west of the country through the cities of Querétaro and Guadalajara, is designed to reduce travel times by more than 65%, Aleatica’s López says. The project, estimated to cost MXN12 billion, would also shave off an hour from the commute between Mexico City and the states of Jalisco and Michoacán to the west, home to the Port of Lázaro Cárdenas, the country’s second busiest port, he says.
Aleatica also plans to incorporate technology to reduce waits at toll booths. With an electronic pass, for example, motorists will be able to drive through tolls without stopping to pay in cash, López says.
The Mexican government plans to invest MXN8.6 billion as part of the national road maintenance program in 2022, including via 10 public-private partnerships (PPPs) to improve 1,755 km of roads. On top of this, Mexico’s state development bank Banobras is seeking MXN363.7 billion in private investment in 177 infrastructure projects, including 26 in transport.
ENERGY PROJECTS
It’s not only roads. Mexico also needs huge investments in its energy infrastructure. Sempra Infrastructure Partners, a division of San Diego, California-based Sempra Energy, has built a $200 million storage terminal for refined products like diesel and gasoline in Topolobambo in the northern state of Sinaloa. It is now building a natural gas liquefaction terminal in Ensenada, Baja California, a $2 billion project.
Tania Ortiz, head of the company in Mexico, says there are big opportunities for gas sales in the country, given that the fossil fuel still only meets 7% of domestic energy demand.
“There is an incredible opportunity there because it is gas,” she says.
Mexico’s state-owned oil company Pemex plans to invest $1.35 billion in eight projects to ramp up the country’s gas production, which has been in decline. Mexico’s gas demand is expected to grow 4.7% from 2020 to 2024, according to data from the government. The growth in gas demand could increase as the world shifts from oil to cleaner-burning gas as a transition fuel to meet the target of net-zero carbon emissions by 2050.
THE INFLATION THREAT
There are hurdles for developers. The biggest, perhaps, is that the cost of materials to build infrastructure projects, from cement to steel, has been surging since the Russian invasion of Ukraine in February, while the Mexican central bank has been increasing the monetary policy interest rate to try to contain inflation.
“The projects are surely going to have higher costs,” says Jorge Mendoza, CEO of Banobras, Mexico’s state-owned development bank. “We are seeing increases in the cost of cement, steel. We have an increase of 60% year over year.”
Scrap metal, a primary input to produce steel, is expected to increase by 25% in the coming months, says Allen Huerta Beeri, head of international and industrial purchases of raw materials at Brazilian steel company Gerdau in Mexico.
Quiroz at Monex warns that the rising costs could stall some projects. “When prices are so high, I believe that many investors will be postponing their investment decisions,” which coupled with the sluggish economic growth could lead to less spending in infrastructure projects, she says.
“When prices are so high, I believe that many investors will be postponing their investment decisions.” –
Janneth Quiroz
Despite the rising prices, Banobras could double its financing for infrastructure projects to up to MXN200 billion this year from 2021 if the government’s spending plans require more funding, according to Mendoza. Some of the funds for on-lending could come from a possible sale of MXN10 billion worth of sustainable bonds before the end of the year if there is “a good opportunity,” Mendoza says.
In May, Banobras raised MXN10 billion in a three-part bond sale in the local market in a deal that 1.4 times oversubscribed. The development bank said it will use the proceeds to provide funding to states and cities and also finance infrastructure projects.
Mexico plans to complement its infrastructure spending plans with PPPs because the federal budget is “not enough” to pay for everything, Fernando Romero, a director of investments at Mexico’s finance ministry said at the 14th Mexico Subnational Finance and Infrastructure Forum hosted by LatinFinance in April.
López at Aleatica is optimistic that the push to improve infrastructure projects will gain in Mexico. “We all want to be better infrastructure,” he says. “There are the banks, there is the government, there is the private initiative. Everyone wants to participate
