Green light for PPPs

Now that Mexico’s public-private partnership (PPP) law is officially in place following formal endorsement by President Felipe Calderon in mid-January, there appears to be little to stop the country from starting to address its infrastructure needs. Transportation and social infrastructure projects that have long been overlooked now have the potential to become high-profile deals. Not surprisingly, private investors are sizing up the opportunity and reaching for their wallets.

“We will be hearing more from the Canadians and Europeans in the next few months,” Luis Manuel Sada-Beltran, an associate at law firm Sanchez-DeVanny Eseverri in Mexico City, confidently told Infrastructure Investor. “Canadian and European investors have experience in these types of projects and they will try to take advantage of this opportunity in Mexico.”

Small miracle

The PPP law south of the US border is one that has been in the works for years. Its realisation may be seen a small miracle, since the lack of a legal framework and political bottlenecks have sidelined the market for years.

“Having this law allows investors and construction companies more opportunities to get the financing they need to develop projects,” said one industry analyst. “For many years, the government had projects in mind but without the legal framework it was very hard for companies to get involved.”

PPPs could theoretically attract institutional capital and have a big impact on the development of Mexico’s infrastructure. However, progress at the central government level is not the ‘be all and end all’.  

For the federal government’s formal legislation to mean anything, individual states require knowledge on how to access financing tools and, perhaps more importantly, must have the courage to move forward with change; characteristics that continue to be absent north of Mexico’s border.

Sada-Beltran is confident that Mexico is better positioned than the US when it comes to the opportunity for PPP projects and that the Latin American nation may eventually surpass its North American neighbour in quantity of deals. He expects a rush to transportation and social infrastructure – primarily prison construction – deals in Mexico. “In terms of the number of projects, I think the US is better positioned and could take advantage of this for a little while, but that will reverse in coming years in favour of Mexico,” he says.

In Mexico, local government authorities have in many cases already laid the groundwork for public-private partnerships to materialise. For instance, in the northern state of Nuevo Leon, the PPP law is a near replica of Mexico’s federal legislation; and the majority of other states already have policies in place to support PPP deals. The handful of states without any formal legislation are likely to adopt some kind of legal framework shortly, according to Sada-Beltran. This should help to accelerate the pace of PPPs in the country.

Moreover, the law dictates that projects should abide by the rules of whatever government agency – whether federal or local – that is allocating the largest percentage of capital. This clear position should help to avoid any conflict about the competing claims of local and central agencies over the running of a project.  

Further underscoring the new law’s potential is some good news from ratings agency Fitch, which earlier this month indicated that, in light of the legislation, the risk scenario for debt investors was more attractive than it had been previously.

“If rating agencies are backing up these kind of infrastructure projects, of course it will give investors a heads-up to start investing. We have heard of a lot of investors and developers in the market that are ready to invest,” says Sada-Beltran.

Although it remains uncertain how future PPPs will be rated in Mexico, one thing appears abundantly clear. “Now that this law has been passed, I expect we will see more of these types of projects in the market,” the analyst source said.