What came first: the chicken or the egg? This age-old question has its own infrastructure-related equivalent, comparing funding and projects. While developers often argue a lack of funding options, investors seem to complain about a lack of viable projects. But which one is true?
According to a panel of experts taking part in Mexico Infrastructure & Sustainability Summit at the Sheraton Maria Isabel in Mexico City on Wednesday, the answer lies somewhere in between. Rafael Trejo, Deputy Director of Structured Instruments of the Investments Division at Afore XXI Banorte, argued that there is certainly no lack of funds. “Afore XXI Banorte has committed more than MX$60 billion to CKDs, of which around MX$17 billion are invested in infrastructure.”
Santiago Ortiz, Director General of GBM Infraestructura agreed. “Lack of liquidity does not exist,” he said. “In fact, there is an absurd liquidity in funds that want to invest, especially in infrastructure and energy projects.”
Moderator Mario Maldonado, Columnist at El Universal, pointed out that, in the last year, infrastructure and construction investment has dropped, a point with which Trejo agreed. However, he also explained that, although there is a great deal of interest in infrastructure projects from pensions funds like Afore XXI Banorte since they are natural, long-term investments, the challenge lies in finding the right projects. “What I see is that there is more and more money coming from Afores, international pension funds and asset managers, but we need to channel it well into the right projects.”
Around MX$3.02 trillion, which is equivalent to 15 percent of Mexico’s GDP, is managed by Afores and MX$146.9 billion has been invested by Afores through 74 issues of CKDs and CerPis. Yet, as pointed out by Maldonado, Mexico invests just 1.5 percent of its GDP in infrastructure projects, which is around half the regional average.
Ortiz added that federal budgetary issues can throw a spanner in the works of PPP projects since the private sector is unwilling to take on a greater share of the risk. “Sometimes we find that, although there are projects, many do not get carried out for different reasons,” he said. “But I would attribute this fall in investment to federal budgetary difficulties, and I would add that the funding still exists.”
Sergio Forte, Executive Director General of Investor Relations for Banobras, and the only public-sector representative on the panel, argued that this is largely because of staggering drops in oil revenues. “Oil income has decreased by 50 percent so, since it is now more important than ever for the federal government to manage funds well, nonurgent projects are not often prioritized,” he explained. Nevertheless, Forte, who played an integral part in the development of the Bancomext Projects Hub, insisted, “I have never seen so many opportunities in Mexico for the private sector.”
He also highlighted government subsidies as an issue in attracting private investment in infrastructure. When asked by the audience what happens with projects that are highly necessary but not economically viable, he admitted that there are many projects that are highly socially viable but do not generate flows.
To solve this, he cited the fear of charging for services that all other countries in the world charge for, like water. “If we do not charge for water, it will be difficult to finance these projects as they will not generate flows and ROI,” he said. He added that, like the Canadian model, the federal government could be less involved in infrastructure projects, instead delegating them to the individual states and municipalities.
The conversation continued to NAICM, as Maldonado enquired as to why only one Afore had invested in the megaproject and whether there was a lack of appetite for public works projects. Othón Pérez, Associate of Business Development at FOA Consulting, responded that PPPs for the airport are not viable because of its magnitude. However, he added that “in the future, the same tender packages should be made into O&M contracts for private operators to maintain cashflows.”
According to Trejo, institutional investors choose infrastructure projects based on current and future cash flows. “There has certainly been no lack of funding for this project, but due to regulatory issues, we need to conduct very thorough risk assessments due to the nature of the assets we manage,” he said. “International funding is equipped to move much quicker.”
Forte agreed, saying, “NAICM has very high rates, meaning they are not such an attractive investment for Afores.” Trejo also added that, at the end of political administrations, it is normal for investment in public works projects to tail off.