The content has been shared, if you want to share this content with other users click here.
2018 will be a defining year for Mexico due to key events such as the mid-year presidential elections and the process to renegotiate the North American Free Trade Agreement (NAFTA) with the US and Canada.
BNamericas spoke to Edmundo Gamas, executive director of the Mexican infrastructure development institute (Imexdi), to hear his perspective on how these events could impact infrastructure development and investment in the country, as well as to learn about the scenario he expects for the sector next year.
BNamericas: How could a negative outcome in the NAFTA renegotiations, such as the US exiting the agreement, impact the Mexican infrastructure sector?
Gamas: Over this year, both the Mexican government and the business sector have realized that the possibility of the US walking away from NAFTA wouldn't be the end of the world. If that were to happen, trade relations between the two nations would have to comply with WTO rules, which would make Mexico equally competitive.
Trade flows between the two countries would barely be affected by US withdrawal from NAFTA. This is an opinion shared by most people in Mexico, myself included.
This year, for example, automotive industry exports increased despite the uncertainty about the future of NAFTA. Exports probably grew in other sectors too. Although it's possible that some companies will cancel projects if the US withdraws from NAFTA, I think the effect on the infrastructure sector won't be significant.
Something positive that has come out of this process is the fact that Mexico has started shifting from a north-south approach to a more east-west approach in terms of infrastructure. For many years the infrastructure focus was centered on trade with the US. Nowadays, both the Mexican government and the business sector are becoming more aware of the importance of improving the country's ability to trade with Asia and Europe. This means we'll start seeing more investments in ports. Investments in special economic zones are still developing, as well as east-west road and rail corridors from and not just north-south, which I think will be very positive.
BNamericas: Which ports do you think require strategic investments?
Gamas: Lázaro Cardenas and Salina Cruz ports will be included in special economic zones, which means they'll probably need major expansions. In the Gulf of Mexico, Tuxpan port is becoming very important because it's the main gateway to import gasoline to the country's highlands and central region. Dos Bocas port will probably be included in a special economic zone, as will Coatzacoalcos port. These two will be developed due to the oil industry and the special economic zones. There are good prospects for more investment in the ports, particularly in the form of public-private partnerships [PPP].
BNamericas: What about investments in airport and railway infrastructure?
Gamas: Regarding airports, private groups have responded well to growing infrastructure needs. A couple of years ago the government announced that some of the medium-sized airports that are still publicly operated would be developed under a PPP model. This could make them more competitive.
As for railway infrastructure, there's still room for improvement. Although most of the sector is controlled by private operators, most investments in rail lines, particularly bypasses to reduce traffic congestion in cities, are being made by the government. But there are still significant investment needs. More resources are needed in the coming years, either from the government or through PPPs.
BNamericas: Even during times of uncertainty in the trade relationship with the US?
Gamas: The truth is that exports are growing rapidly. The uncertainty we faced at the beginning of this year meant some of the projects were canceled, while others were put on stand-by. However, we're closing this year with record exports. The business sector and the government are no longer scared of the US withdrawing from NAFTA. US companies, particularly in the automotive and aerospace industries, will use their lobbying power with the US Congress to minimize changes in their supply chains.
BNamericas: What kind of scenario do you foresee for the months preceding the elections in regard to public spending on infrastructure?
Gamas: Although the candidates have yet to launch their platforms, all of them will promise more infrastructure projects. Some candidates will prioritize some issues over others, as well as the regions where they will want to develop them.
In the case of Andrés Manuel Lopez Obrador, he could appear less friendly toward PPPs during his campaign compared to other candidates because of his nationalist platform and his focus on state ownership of natural resources and critical infrastructure. However, given that he also announced his intention not to assume more national debt, it seems likely that he'll have to accept the fact that PPPs are essential for infrastructure development.
I think all the candidates will support infrastructure and PPPs as a key tool. During the political campaigns the differences will be based on the type of projects prioritized by each candidate.
BNamericas: What reaction do you foresee from local and international investors during the elections and in the post-election period?
Gamas: Given that the government has the final say on the projects to be developed, the investment scope of the private sector is limited by the portfolio the government wants to implement. The private sector has always shown interest in investing in projects that are profitable in the long-term and will align its priorities with those of the government. As long as the projects are well-planned and done transparently, domestic and international investors will be interested in participating.
BNamericas: Do you think next year's elections are a risk factor for the infrastructure sector?
Gamas: That could be the case with Morena candidate López Obrador, who has openly declared his intention to cancel the new [Mexico City] airport project and replace it with an alternative. Given the funds that have already been invested in the project and the numerous commitments already agreed, this could be a dramatic decision. Canceling the project could have a negative impact on Mexico's international image as a reliable country for investment. In that case, there's certainly some risk. The same could be said about López Obrador's campaign promise to reverse the energy reform.
All the other candidates back the reforms to different degrees and will support the implementation of future PPPs. With López Obrador, although I think he'll eventually embrace PPPs, any remarks against them during his campaign could have a negative impact on the opinion of the private sector.
Infrastructure investment hasn't been affected by the upcoming elections so far. The finance ministry still needs to tender blocks 2 and 3 of its PPP strategy next year, and everything seems to be going according to plan.
BNamericas: Should we expect increased public spending as 2018 is an election year?
Gamas: I'd be surprised if that were the case. The spending budget for 2018 has already been approved by congress, and the likelihood of the government spending funds that weren't earmarked by congress is very low. The government will make an effort to complete approved projects or those already under development by the agreed deadlines, but I doubt that any additional projects could be implemented. I don't see the conditions or the budget for that to happen.
BNamericas: What role could corruption play in the progress of Mexico's infrastructure sector next year?
Gamas: Rather than halting the development of the infrastructure sector, corruption has led to a loss of public trust in how the government spends taxpayers' money. Corruption has contributed to greater social unrest. Citizens don't necessarily reject infrastructure projects; they just have little confidence in the public sector as administrator and manager of infrastructure projects.
People see a lack of transparency in planning, tendering and operating processes. Most times there's lack of public information in tenders and contracts. There's definitely a long way to go in terms of transparency. Although some efforts have been made, they aren't enough.
Social dissatisfaction resulting from corruption could be exploited by certain political campaigns. That's a shame because people question PPPs and not necessarily corrupt practices. The private sector takes the blame when, in reality, the problem is the lack of transparency.
BNamericas: Do you think that we can expect any regulatory or legislative change to combat corruption in public works as a result?
Gamas: That would be ideal, but I seriously doubt it will happen. The current government and legislature will only focus on the things that they have to complete before their term expires.
BNamericas: What's the overall scenario that you foresee for the Mexican infrastructure sector next year?
Gamas: It's moderately optimistic. I don't think that we'll see any new projects apart from the ones already announced. There's a good chance that planned projects or those already under development will see delays, as that's the norm for infrastructure projects. Overall, I could say that the scenario will remain positive, unless a campaign specifically targets private sector participation in infrastructure. I don't see any other clouds on the horizon that could cause any problems.
About Edmundo Gamas
Edmundo Gamas is responsible for the strategy and operation of Imexdi, the first organization in Mexico devoted to the development of the country's infrastructure.
Gamas previously worked as an independent consultant to many Fortune 500 companies on matters related to project evaluation and finance, as well as financial and economic analysis.
About the company
The Instituto Mexicano de Desarrollo de Infraestructura (Imexdi) is a non-profit organization founded to foster, drive and articulate the development of infrastructure in Mexico.