Mexico Infrastructure: A Need to Reform

Vol. V. Issue 2 - June, 2008

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 percent to 3 percent 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 percent.
Additionally, when energy-related investment is excluded, annual infrastructure investment drops to 1.8 percent of GDP. Contrastingly, Chile and China invest 5.8 percent and 7.3 percent of GDP respectively in infrastructure. The National Infrastructure Program aims to avert this trend.
The administration of Mexico President Felipe Calderon 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 National Infrastructure Program would increase infrastructure investment by 50 percent 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 infrastructure. The NIP also aspires to place Mexico on track to rank in the world's top 20 percent for infrastructure competitiveness by 2030.

Sectors affected

Of the 10 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.

According to the program's detailed description of the base scenario, roughly 55 percent of the financing for the entire project will come from federal, state and municipal sources and the remaining 45 percent 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 $141 billion 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.

Railways

The plan to expand the current railroad system involves $4.5 billion 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 be completed at the beginning of 2008.
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 10 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 10 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.

Airports

The primary project to increase infrastructure in airports is to construct three entirely new commercial airports in the Mayan Riviera, Puerto Penasco (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 Vallarta. All 16 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 studied.

Seaports

Five new seaports are to be constructed in Bahia Colonet (Baja California), Manzanillo, Veracruz, Seybaplaya and Puerto Morelos. Additionally, 22 ports will either be expanded or modernized along the Mexican coastline. The $6.6 billion in funding, which will come mainly from private investors, will be distributed throughout 17 projects, four of which have commenced or will commence operation before 2008. During 2008, another six projects will be underway. In addition to the 17 that comprise this sector's infrastructure development, seven more are under consideration at the moment.

Potable water and 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 percent to 92 percent, the treatment of residual water from 45 percent to 60 percent and the amount of drainage from 87 percent to 88 percent by 2012. Three new aqueducts and seven treatment plants will be built. Also, thirteen treatment plants in Acapulco will be modernized and refurbished. More than 50 projects — nearly all starting by 2008 at the latest — will require more than $14 billion in investment to accomplish the goals set forth.

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

Electricity

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 percent of the 54 projects. This will be a sector of infrastructure that may require an incredible $35 billion for its objectives to be achieved.

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 $76 billion 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

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.

By The U.S. Commercial Service, Twin Plant News magazine – February, 2008.