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o: National Infrastructure Program

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Mexico: National Infrastructure Program

2007 – 2012

Adrián Orta, Patrick Hess August 2007

Summary

On July 18, 2007, Mexico’s President, Felipe Calderon, unveiled his administration’s master infrastructure development plan – titled the National Infrastructure Program (NIP). The expenditures associated with the program are to be implemented through the remainder of President Calderon’s term (2007 – 2012); yet, some of the objectives within the plan have an outlook that extends past this time frame. Depending on whether Congress approves the current fiscal reform proposal (which will generate the revenue necessary for the NIP), the breadth of the program may vary significantly. From airports to seaports, there will be many opportunities for U.S. businesses to become primary/sub-contractors or suppliers to these multi-year infrastructure projects. U.S. firms interested in learning more about specific upcoming tenders are encouraged to be in touch with the U.S. Embassy’s Commercial Service, which can arrange appointments with key officials and identify sources of financing for your U.S. made good or service. Infrastructure in Mexico: A Need to Reform

Although the last decade has seen some improvements in Mexico’s infrastructure network (especially improved access to water and sanitation, electricity and telecommunications), Mexico’s infrastructure investment has continually declined since 1988 – from 7% to 3% of GDP. This has directly corresponded to a drop in Mexico’s competitiveness with respect to other countries and regions. To be considered a highly competitive country, Mexico must increase levels of infrastructure development, which over the last five years averaged just 3.2%. Additionally, when energy related investment is excluded, annual infrastructure investment drops to 1.8% of GDP. Contrastingly, Chile and China invest 5.8% and 7.3% of GDP respectively in infrastructure. The National Infrastructure Program aims to avert this trend. NIP: The Basics

The Calderon administration laid out the three possible scenarios that would determine the extent of the National Infrastructure Program: “inertia”, “base” and “outstanding”. The base scenario seems to be the most probable; therefore, many of the predicted figures given by the administration (and in this report) are based on these assumptions. The base scenario requires that Congress pass fiscal reform currently under scrutiny, and that at least half of the resulting revenue increases are directed toward the National Infrastructure Program. The inertia scenario assumes Congress fails to approve fiscal reform, which would ultimately decrease infrastructure investment below current levels. Calderon’s outstanding scenario would see the passage of not only fiscal reform but also reforms in the areas of labor, energy and/or telecommunications. Such reforms would increase the amount of monies available for infrastructure development to levels higher than that of the base scenario. The table to the left reveals the primary economic forecasts associated with the three scenarios of the NIP1. Please note that throughout this report all US dollar conversions were determined using the July

$156.02.5%0.0%

0

$234.84.0%0.6%

720,000

$312.75.5%1.2%

1,440,000

Economic Impacts of Each Scenario 2007 - 2012

Average Annual Investment (% GDP)Additional Annual Growth (GDP)Additional Jobs

Total Investment (Billions of USD)Average Annual Investment (% GDP)Additional Annual Growth (GDP)Additional Jobs

Inertia Scenario

Base Scenario

Outstanding ScenarioTotal Investment (Billions of USD)

Total Investment (Billions of USD)Average Annual Investment (% GDP)Additional Annual Growth (GDP)Additional Jobs

1 Martínez, Roberto and Vega, Laura. El Economista, “Inversión record en infraestructura, condicionada a la reforma fiscal” (07/19/2007).

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24, 2007 Inter-bank Rate of 10.78282 MXN/USD according to http://www.oanda.com/convert/classic. Before the end of September 2007, it is assumed that the Mexican Congress will vote on fiscal reforms proposed by Calderon’s administration, which –if passed– will generate the necessary public financing to fund the NIP. Assuming passage of the reform, a budget will be drafted to include the NIP and given to Congress once again for approval. Decision on the budget can be expected by November 15, 2007. Of the more than 250 new infrastructure projects planned, tenders will become available immediately, so long as the budget is approved, to Mexican and international firms. The National Infrastructure Program would increase infrastructure investment by 50% compared to the previous administration. It is predicted that this extra investment will enable the NIP to place Mexico as a leader in infrastructure coverage and quality within Latin America –a drastic improvement from their current ranking of 60 out of 125 countries worldwide in infrastructure2. The NIP also aspires to place Mexico on track to rank in the

orld’s top 20% for infrastructure competitiveness by 2030. w Sectors Affected by NIP

Of the ten sectors that will have infrastructure investment from the NIP, seven are deemed a priority. As such, these seven sectors have the most information available regarding projects that are planned or already occurring. Highlights and details on the major projects in store for each of these seven sectors are given in the following sections. The table below displays the forecasted financing from both public and private sources that the National Infrastructure Program will generate over the next five years3. Note that the sectors highlighted in yellow are the seven priority sectors addressed previously in this paragraph.

Public Private Total Public Private Total Public Private TotalAgriculture & Flood Control $2.1 $0.7 $2.8 $3.3 $1.1 $4.5 $4.5 $1.5 $6.0Railways $1.6 $1.3 $3.0 $2.5 $2.0 $4.5 $4.7 $3.8 $8.5Airports $0.9 $0.7 $1.6 $3.0 $2.5 $5.5 $3.9 $3.3 $7.2Seaports $0.9 $3.2 $4.2 $1.5 $5.1 $6.6 $2.3 $7.8 $10.1Potable Water & Sanitation $6.8 $2.9 $9.7 $10.0 $4.3 $14.3 $11.9 $5.1 $17.0Telecommunications $1.7 $23.9 $25.6 $1.8 $24.5 $26.2 $1.8 $25.3 $27.2Highways $8.1 $6.5 $14.6 $14.7 $11.9 $26.6 $21.1 $17.0 $38.1Gas & Petrochemical Refining $17.1 $17.1 $35.1 $35.1 $51.7 $51.7Electricity N/A N/A $21.4 N/A N/A $35.2 N/A N/A $47.5Hydrocarbon Production N/A N/A $56.1 N/A N/A $76.2 N/A N/A $99.3Total Investment $85.8 $70.2 $156.0 $129.1 $105.7 $234.8 $172.0 $140.7 $312.7

Estimated Investment in Infrastructure, 2007 - 2012 (Billions of USD)Base Scenario Outstanding ScenarioInertia ScenarioSector

According to the program’s detailed description of the base scenario, roughly 55% of the financing for the entire project will come from federal, state and municipal sources and the remaining 45% from the private sector . For the purposes of this report, the percentage breakdowns in the two other possible scenarios are identical. That is, the inertia and outstanding scenarios have the same public/private percentages overall and for each sector. These figures cover a great diversity of infrastructure industries and will potentially provide firms with supplier opportunities worth up to nearly $141B over the next five years. In the following sections, details on each infrastructure sector are described, including information on recently planned projects as well as projects that have already commenced.

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Railways

The plan to expand the current railroad system involves $4.5B of investment over five years. Among other things, these funds will be used to add 881 miles of railway track throughout Mexico and to expand the suburban train system in Mexico City. In fact, the Mexico City system will be improved through three projects, one of which will

2 Ramírez, Karla and Hernández, Alma. Reforma, “Alistan infraestructura” (07/18/2007). 3 “Visión de Largo Plano” and “Visión Sectorial”, Programa Nacional de Infraestructura 2007 – 2012. www.infraestructura.gob.mx.

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be completed at the beginning of 20084. Collectively, the three projects will benefit 25 million citizens and save a combined two and a half hours in travel time . As well, there will be an additional ten multi-modal corridors added to the current eight by 2012. To accomplish these goals, twenty-three work projects have been confirmed and an additional five are still in the planning phase. Work on ten of these projects has already begun or may begin before the end of the year. Another four projects are scheduled to follow suit in 2008 .

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Airports

The primary project to increase infrastructure in airports is to construct three entirely new commercial airports in the Mayan Riviera, Puerto Peñasco (AKA Rocky Point) and Ensenada. Thirty-one existing airports will be substantially expanded, including Toluca, Puebla, Cancun, San Jose del Cabo, Loreto, Nuevo Leon, Monterrey, Guadalajara and Puerto Vallarta5. All sixteen of the projects designed to accomplish these developments have either started or will start no later than 2008. An additional two more expansion projects and a new airport plan (in Merida) are currently being studied6. Seaports

Five new seaports are to be constructed in Bahía Colonet (Baja California), Manzanillo, Veracruz, Seybaplaya and Puerto Morelos7. Additionally, twenty-two ports will either be expanded or modernized along the Mexican coastline8. The $6.6B in funding, which will come mainly from private investors, will be distributed throughout seventeen projects, four of which have commenced or will commence operation before 2008. During 2008, another six projects will be underway. In addition to the seventeen that comprise this sector’s infrastructure development, seven more are under consideration at the moment . 5

Potable Water & Sanitation

Thirty percent of the investment into improving water sanitation will be concentrated in the Valle de Mexico in the center of the country. The NIP hopes to raise the national level of potable water from 90% to 92%, the treatment of residual water from 45% to 60% and the amount of drainage from 87% to 88% by 2012. Three new aqueducts and seven treatment plants will be built. Also, thirteen treatment plants in Acapulco will be modernized and refurbished9. Over 50 projects – nearly all starting by 2008 at the latest – will require over $14B in investment to accomplish the goals set forth . 5

Highways

One of the most talked about sectors benefiting from the NIP is that of the highway system. $26.6B will allow for the construction, modernization and refurbishment of 10,937 miles of highways and rural roads all over Mexico . More specifically, $14.5B will be for the construction and modernization of 870 miles of highway, $6.2B for routine maintenance of 27,816 miles of highway and $5.8B for construction and modernization of 1,181 miles of rural roads

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10. Over 100 projects, separated into five regions, are either confirmed or currently in action. Of the projects that haven’t already started, the majority of them are expected to start before or during 2009 . 5

Electricity

4 Acevedo, Luis. El Universal, “Plan de Infraestructura no excluye regiones: Luis Téllez” (07/30/2007). http://www.eluniversal.com.mx/notas/439843.html. 5 Cruz, Lilian and Córdoba, Mayela. Reforma, “Planean 3 aeropuertos” (07/19/2007). 6 “Anexos”, Programa Nacional de Infraestructura 2007 – 2012. www.infraestructura.gob.mx. 7 Barrera, Adriana. Reuters. “México lanza ambicioso plan de Infraestructura” (07/18/2007). 8 Martínez, Roberta and Vega, Laura. El Economista, “Destinarán 2.5 billones de pesos a Infraestructura” (07/19/2007). 9 Osorlo, Victor. Reforma, “Recicla la Federación proyectos hidráulicos” (07/20/2007). 10 Ramírez, Karla. Reforma, “Reconcesionan vías del Farac” (07/19/2007).

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Electricity infrastructure improvements are to be carried out in projects in generation, transmission and distribution. Moreover, these categories of projects are broken down further: relating to the country as a whole and strictly to the central zone of Mexico. Electricity generation has the most resources devoted to it, encompassing over 60% of the 54 projects. This will be a sector of infrastructure that may require an incredible $35B for its objectives to be achieved . 5

Hydrocarbon Production

Of the priority sectors, the largest investment in the National Infrastructure Program will further develop Mexico’s capacity for hydrocarbon production. As a major source of revenue to the Mexican government, PEMEX (the state owned petroleum producer) is in need of investment in the exploration, refining and production (basic petrochemicals, gas and more complex petrochemicals). More than $76B is earmarked for this cause, which is broken up into forty projects. Over half of the projects have a planned start dates between 2008 and 2011. Market Opportunities for U.S. Firms

As a U.S. exporter, it is important to know that many, but not all, of these development projects will be open to wholly owned international firms. However, strictly national tenders also present potential opportunities for American firms to partner with local firms. In order to bid a contract that is open solely on the national level, partnerships can be made with a Mexican counterpart, who must be the majority shareholder. These Mexican partnerships often prove quite helpful to U.S. firms hoping to succeed in the local market. A Mexican partner will provide U.S. firms with local experience and expertise, while the U.S. firm will provide new technologies, techniques and financial support to develop projects. In order to achieve all objectives set forth in the NIP, the Calderon administration will attempt to use more Public-Private Partnerships (PPP’s), in addition to traditional concessions, to boost private investment in the plan′s major infrastructure projects. The main goal of the plan is to improve Mexican infrastructure and make the country more competitive, using PPP’s as the vehicle.

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For More Information

The U.S. Commercial Service in Mexico City can be contacted via e-mail at: Adrian.Orta@mail.doc.gov; Phone: (52-55) 5140-2619; Fax: (52-55) 5566-1115; or visit our website: www.buyusa.gov/mexico. The U.S. Commercial Service — Your Global Business Partner

With its network of offices across the United States and in more than 80 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://www.export.gov/eac. Our services include:

• World class market research • Trade events that promote your product or service to qualified buyers • Introductions to qualified buyers and distributors • Counseling and advocacy through every step of the export process

Comments and Suggestions: We welcome your comments and suggestions regarding this market research. You can e-mail us your comments/suggestions to: Customer.Care@mail.doc.gov. Please include the name of the applicable market research in your e-mail. We greatly appreciate your feedback. Disclaimer: The information provided in this report is intended to be of assistance to U.S. exporters. While we make every effort to ensure its accuracy, neither the United States government nor any of its employees make any representation as to the accuracy or completeness of information in this or any other United States government document. Readers are advised to independently verify any information prior to reliance thereon. The information provided in this report does not constitute legal advice. International copyright, U.S. Department of Commerce, 2007. All rights reserved outside of the United States.

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