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Private Sector Bolsters Mexican Infrastructure Upgrade

Private Sector Bolsters Mexican Infrastructure Upgrade

Mexico’s economy is growing, but some fear a bottleneck will form in the near future as Mexican infrastructure development lags behind. Could the answer in making the necessary upgrades lie with the private sector?

Mexico’s infrastructure challenges

It seems the world is consuming goods manufactured in Mexico almost as fast as Mexico can churn them out, and the FDI continues to roll into Mexico that will facilitate the production of more. New manufacturing plants are being built across the country, particularly in the automotive and electronics industries. But there are potential roadblocks out there that may slow down future growth. Across the board, Mexico infrastructure upgrade is required. New ports are needed, and existing ports need to be expanded and readied to be able to ship and receive more goods. Nationwide, only about 40% of Mexico’s roads are paved. The power grid may soon be challenged in its ability to adequately serve a growing industrial base. A Mexican infrastructure upgrade is pre-requisite, if the country is to keep on track with current economic expansion.

The government responds

The federal government in Mexico has recently placed much emphasis on meeting these challenges and equipping manufacturers with the tools they need to propel the country toward greater prosperity.

Reforms have characterized the Peña Nieto administration, and infrastructure has been named as a top priority. Over a year ago, an ambitious plan was announced for the conduct of a Mexican infrastructure upgrade and overhaul. The National Investment Program has called for the government to inject US $596 billion (about 8% of GDP) between 2014 and 2018 across approximately 750 projects. Of these projects, approximately half reside in the energy sector.

However, while many received the news positively, and as an aggressive response to a pressing need, some believe that the measures that have been outlined may actually be too timid to meet the needs created by the trajectory of current trends in Mexican economic growth. Furthermore, since the country relies heavily on the revenue derived from crude oil, the recent decline in the price per barrel has led to a slight defunding of the National Investment Program. At least one high-profile project – a new, high-speed rail line – has been cut from the program.

The private sector is called upon

With the current obstacles facing the government’s plans for undertaking a Mexican infrastructure upgrade, some are now looking to the private sector for a boost. In March, the Mexican government called upon private capital to become involved in the funding of some projects in order to assist in efforts to prepare the country for future growth. At present, the Mexican finance minister, Luis Videgaray, is formulating and reviewing avenues for attracting more private money to Mexican infrastructure upgrade projects via a potentially lucrative battery of concessions and other mechanisms. This is especially true in the energy sector.

In practice, Mexico has already paved the way for infusions of private investment flows with the economic and legal reforms that have been enacted over the past two years. Since privatizing the energy industry, the country is looking to auction off oil and gas exploration fields to private firms around the globe. Although the National Investment Program has been trimmed back, its sheer size promises there will be ample opportunity for private businesses to partner in the efforts to revitalize and to participate in Mexican infrastructure upgrade efforts.

Both foreign and domestic investors, alike, now view the newly friendly legal framework protecting intellectual property, private property, and investment as a draw for their participation in efforts related to a Mexican infrastructure upgrade. As such, there have already been positive indicators from the private sector that such partnerships will form in order to participate to pick up the slack. For example, Mexican investors in fast-growing private pension funds view infrastructure investment as a key means by which to enhance returns. More and more this is happening as they become co-investors with international infrastructure specialists in Certificados de Capital de Desarollo (CKDs). Interest in CKDs has picked up in recent months. Additionally, participation in the construction, operation and maintenance of toll roads provides another opportunity for private sector partnership to further the reach and efficiency of the country’s transportation network.

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